Earnings Call Transcript - RPM Q3 2020

Operator, Operator

Welcome to the RPM International Conference Call for the Fiscal 2020 Third Quarter. Today's call is being recorded and webcast, and you can access it live or replay it 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 differ significantly. 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 help you understand these non-GAAP terms, RPM has posted reconciliations to the most comparable GAAP financial measures on the RPM website. After today’s presentation, there will be a question-and-answer session. Please note that only financial analysts will be allowed to ask questions. At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Frank Sullivan, CEO

Thank you, Vanessa. Good morning and welcome to the RPM International Inc. investor call for our fiscal 2020 third quarter ended February 29, 2020. On the call with me today are Rusty Gordon, RPM's Vice President and Chief Financial Officer; and Matt Ratajczak, our Vice President of Global Tax and Treasury, who is also heading our Investor Relations functions. I'll start the call by discussing how we are managing our business through the COVID-19 pandemic, then I'll provide an update on our 2020 MAP to Growth operating improvement program. After that, I'll turn the call over to Matt, who will walk through our third quarter results in detail and he'll be followed by Rusty, who will discuss the outlook for the fourth quarter and year end. First, we know that all of you are dealing with disruptions in your professional and personal lives resulting from the COVID-19 pandemic, especially our analysts and investors from the New York City area. I'd like to thank you for being on our call today and for your continuing interest in RPM and wish you and your families good health during this challenging time. At RPM, our priorities have been to protect the health and wellbeing of our associates and their family members, to support our local communities to control the spread of the virus and to serve our customers by maintaining the continuity and success of our business operations. Our 15,000 associates around the world have really embraced these priorities and I'd like to commend them for the incredible work they've done to continue each and every day. When it comes to protecting their health and that of their families, we've established many protocols across our operations. We're taking precautions in our facilities to keep our people safe by aggressively cleaning and disinfecting high-touch areas, practicing social distancing and good hygiene, and have been screening for COVID-19 symptoms prior to entry in all of our facilities for more than three weeks. As of April 7th, we have been informed by 14 of our 15,000 employees that they have had at various times confirmed cases of coronavirus. In these cases, we enacted our protocols to shut down the affected locations, have them thoroughly cleaned and disinfected, quarantined all appropriate affected people, and then reopened the facilities following an appropriate shutdown period. In terms of our communities, we are working from home, monitoring the hygiene and health of our manufacturing and distribution associates and reporting any infection or disruption. We're also donating time and materials to help stem the spread of the virus. In one case, our wood finishes group supplied thousands of plastic bottles to a local distillery that has been converting products to hand sanitizer and providing it for free in the community, especially to healthcare-first responders. In another case, our Rust-Oleum operation sourced its Concrobium fogger product and donated it to first responders so that their air ambulance helicopters could be disinfected and return to service quickly. These are just a few examples of how our operations are responding to local needs. As one of the world’s largest suppliers of specialty coatings and building materials, RPM is in a strong position to weather the toll that the COVID-19 pandemic is having on the global economy. We are taking action to adjust our business activities during this period of uncertainty and are well-positioned with strong cash flow, a solid capital structure and $1.1 billion in liquidity. Many of our products are used for construction, maintenance and repair projects, which are deemed essential in many cases and are relatively recession-resistant. RPM companies around the world, with a few exceptions, have been able to continue to operate their plants and distribution centers. In fact, today nearly all of our North American plants are operational, with a few exceptions, while a number of our international plants have been closed due to government mandates. A large number of our North American customers, such as those in construction, infrastructure, and DIY home and hardware retail, are also considered essential and currently remain open for business. With people spending more time in their homes, there is the potential for increased DIY activity projects. Raw material cost inflation seems to be moderating in a number of our key product categories. Our global supply chain remains strong and our distribution and operations associates continue to work diligently to meet customer demand. We continue to be proactive in taking actions around the globe in our operations as the situation evolves. Now, I’d like to discuss our MAP to Growth restructuring program. It has steadily been gaining momentum each quarter. This quarter is no different as demonstrated by our excellent bottom-line results, strong organic growth, strong earnings leverage and record levels of cash generation. Restructuring activities include enacting operational improvements at our production facilities, consolidating manufacturing plants, de-layering management and rationalizing product lines. During the third quarter and early in the fourth quarter, we announced the closure of two additional plants which brings our total to 20 out of the 31 plants that were originally targeted for closure at the beginning of the MAP to Growth program. Versus last year on a consolidated basis, we realized incremental MAP to Growth savings in the third quarter totaling $21 million, of which $5 million came from manufacturing, $12 million from procurement and $4 million from SG&A. Looking ahead, as the COVID-19 pandemic slows economic and business activity, it is also impacting our MAP to Growth program. While there are some initiatives that can be carried out virtually, many, particularly those dealing with additional manufacturing improvements and the completion of our ERP implementations require a physical presence at some of our plants and offices. Limits on travel and access to facilities have required us to temporarily halt some of our operating improvement activities. As such, we will be extending out the timeline from our original MAP to Growth goals in terms of their ultimate achievement. At this point, there is too much uncertainty to set a new date for reaching our objectives. As our markets stabilize and we gain more clarity into the business conditions, we will communicate our new MAP to Growth timeline. But as you can see, once again, in our third quarter results, our people are executing on our MAP to Growth initiatives very effectively. I'll now turn the call over to Matt Ratajczak for a detailed review of our results for the third quarter.

Matt Ratajczak, VP of Global Tax and Treasury

Thanks, Frank, and good morning, everyone. Note that my comments will be on an as adjusted basis. During the third quarter, we generated consolidated net sales of $1.17 billion, an increase of 2.9% compared to the $1.14 billion reported during the same quarter of fiscal 2019. Organic sales growth was 3% or $34.0 million. Acquisitions contributed 0.7% of sales or $9.0 million, while foreign exchange was a headwind that reduced sales by 0.8% or $9.6 million. This was solid top-line growth during the third quarter, which typically generates our most modest results each year because it falls during the winter months when painting and construction activity is slow. Adjusted diluted earnings per share were $0.23, an increase of 76.9% compared to the $0.13 in the year-ago quarter. Our consolidated adjusted earnings before interest in taxes, EBIT, were up 30.4% to $60.5 million, compared to $46.4 million reported in the fiscal 2019 third quarter. These excellent bottom-line results were largely due to initiatives under our MAP to Growth restructuring program. Our earnings also benefited from pricing and moderating raw material costs. Turning now to our segments. Sales in our Construction Products Group were strong and increased 4.7% to $372.1 million. Growth was primarily organic at 5.1% or $18.5 million. Acquisitions contributed 1% or $3.4 million. Foreign currency translation reduced sales by 1.4% or $5.1 million. Sales growth was driven by market share gains and the introduction of innovative new products with the fastest growth being generated in our roofing below-grade waterproofing and concrete admixtures businesses. Adjusted EBIT in the Construction Products segment increased $6.0 million from adjusted EBIT loss of $0.3 million during last year's third quarter. This improvement was largely attributed to pricing, moderating raw material costs, MAP to Growth savings, and a favorable leverage impact of higher sales volume. Sales in our Performance Coatings Group were $255.7 million, up 1% from the $253.2 million we reported during last year's third quarter. Organic growth was 1.6% or $3.9 million. Sales growth in the segment was mixed. Its highway and bridge maintenance businesses were slowed by government budget constraints, particularly in the UK. However, its protective and marine coatings business unit increased market share and its Continental European operations grew sharply, driven by a new global management structure. Acquisitions added 0.2% of sales or $0.5 million, while foreign exchange was a headwind of 0.8% or $1.9 million. Segment adjusted EBIT increased 33.2% to $24.2 million from $18.2 million during last year's third quarter. Our focus on higher margin products and service offerings as well as MAP to Growth business rationalization initiatives drove a significant adjusted EBIT margin improvement of 230 basis points in the segment. In the Consumer Group, sales were robust, increasing 5.4% to $398.7 million. Organic sales increased 6% or $22.6 million, driven by market share gains and unseasonably warm winter weather in North America that enabled consumers to complete more DIY home improvement projects. The fastest growth was achieved in our caulks, sealants, and patch and repair product lines. There was no impact from acquisitions during the quarter. Foreign currency translation reduced sales by 0.6% or $2.2 million. Adjusted EBIT in the Consumer Group was $32.1 million, an increase of 19.2% over the prior year. This bottom-line performance was driven by savings from our MAP to Growth operating improvement plan and were partially offset by inflation in certain raw materials and channel mix. On the top-line, the Specialty Products Group’s wood coatings business successfully outperformed its peers in a challenging market. However, sales of the segment’s water damage restoration products faced a difficult comparison to the prior year when demand was exceptionally high due to significant weather events in North America. Sales were also down in our OEM fluorescent pigments, nail polish and edible coatings businesses. Segment sales were $147.5 million. Organic sales decreased 7.1% and foreign currency translation reduced sales by 0.3%. The segment benefited 3.3% or $5.1 million from acquisitions. Adjusted EBIT was $17.5 million during the quarter, which was lower than the $20.2 million of adjusted EBIT reported in the same period last year. Savings from our operating improvement program helped to mitigate the impact declining sales volume had on earnings. In addition, we have new management in place and are implementing cost-cutting measures and new processes to reignite growth. Now, I'll provide some comments on our cash flow and liquidity. For the first nine months of fiscal 2020, cash from operations grew by 162% to $381.2 million, compared to $145.5 million a year ago. This increase of $235.7 million was due to improved working capital management and operating improvement initiatives. Free cash flow improved to a source of cash of $137 million during the first nine months of fiscal 2020, as compared to a use of cash of $74.5 million during the first nine months of fiscal 2019. This $211.5 million increase is a result of higher earnings, coupled with overall improved working capital metrics. Next, a few comments on our liquidity profile. The maturities of our long-term debt portfolio are nicely staggered with the next scheduled maturity out in November of 2022, and we have multiple options for access to short-term liquidity under both our revolving credit and accounts receivables facilities. Further, in the month of February, we improved our financial flexibility and increased our liquidity by $400 million by securing two three-year term loans. We borrowed $400 million immediately after closing and swapped to a euro fixed interest rate of approximately 0.6%. The proceeds were used to pay down the balance on our revolving credit facility. Finally, as Frank stated, at February 29, 2020, our total liquidity including cash and committed revolving credit facilities was $1.1 billion.

Rusty Gordon, CFO

Thanks, Matt. As part of our MAP to Growth program, we established the goal of repurchasing $1 billion of our stock. In March subsequent to the end of the third quarter, we exceeded the halfway point of that goal when we repurchased approximately $25 million of our common shares. This is in addition to the $300 million we repurchased during fiscal 2019 and the first three quarters of fiscal 2020, coupled with $200 million cash redemption of our convertible notes in November of 2018. While we were making good progress on this goal, given recent macroeconomic uncertainty resulting from the COVID-19 pandemic, we have suspended our share buyback program. Looking ahead, the fourth quarter is seasonally our strongest and was off to a good start in March. Consolidated sales for the month increased 5% over the prior year, led by the Specialty segment which was up 9%, Consumer was up 7%, Construction Products Group sales increased 7% and Performance Coatings Group declined 3%. However, like most companies, we expect our financial results to be impacted by the disruption and uncertainty COVID-19 is having on the global economy. Today, nearly all of our plants are open in North America, where we generate 74% of our sales. Some of our international plants have been shut down due to government mandates around the world. These facilities generate approximately 6% of RPM sales. While these shutdowns are at various durations, ranging from days to weeks, they are likely to impact our fourth quarter sales in April and May. In our Construction Products Group, demand for our innovative products and solutions has been robust and the segment has very strong momentum behind it. Construction is on the U.S. Department of Homeland Security’s Essential Critical Infrastructure Workforce Advisory list. The segment has a large number of hospital and healthcare system clients that will continue to require its offerings. During a good sales month in March, Tremco was able to support schools during this unexpected shutdown by moving up planned roofing and other facility restoration work. At our Performance Coatings Group, results will be mixed. We anticipate seeing a boost in sales for our hygienic seamless flooring systems. However, the portion of our corrosion control and fireproofing coatings that are tied directly or indirectly to oil and gas markets, a little more than $200 million in sales annually, may be at risk should there be a prolonged drop in pricing in those markets. So, we are closely monitoring investment in this area. POS takeaway at our Consumer Group has been strong with unit growth in the mid to high single-digits, particularly for our professional and consumer cleaning and disinfecting brands, some of which are effective against the coronavirus. The majority of the segment's sales are in North America where DIY home and hardware retailers remain open for business. As consumer shelter in place, they are spending more time in their homes and have more time and interest in home repair, maintenance, improving and cleaning projects, which should continue to benefit the segment. In our Specialty Products Group, the outlook is mixed. Some of our companies such as our marine coatings business will be slowed by the closures of their distributor and retail networks. On the other hand, Legend Brands which manufactures cleaning products and equipment is seeing spiking demand as its restoration contractor base is shifting to disinfecting services and this trend should continue over the coming months. According to current government projections, it appears that the COVID-19 crisis may reach its peak in April or May. This is obviously a fluid situation and the information available to us is rapidly changing. As we sit here today, we anticipate that our consolidated fourth quarter revenue will be down 10% to 15% year-over-year. This assumes our strong March results are counterbalanced by sales drops in April and May of 15% to 20%. With that being said, given the uncertainties around this crisis, we are withdrawing our prior earnings guidance for the fourth quarter and full-year of fiscal 2020. We will continue to assess the situation and the short and long-term impacts of COVID-19. We are taking aggressive actions to manage cash flow by reducing working capital, capital expenditures and discretionary spending. The MAP to Growth program timing has been fortunate for us in this regard, since we have improved margins and are starting to see the benefits of our working capital reduction program, resulting in improved cash flow this year. Additionally, as Frank and Matt mentioned, we have significant liquidity and a strong balance sheet, which we anticipate will keep us in a solid financial position. This concludes our formal comments. We will now be pleased to take your questions.

John McNulty, Analyst

So, I guess the first one would just be on the revenue outlook. So, the commentary around April and May looking down 15% to 20%, it's a tough market to try to forecast now. But looking at some of Rusty's commentary on each of the divisions, it doesn't sound like it's trending quite as bad as maybe that guidance would necessarily indicate. So, I guess, where are the puts and takes there? And I guess when you think about the four segments, where you see kind of the biggest pressures when you're looking at that 15% to 20% down versus maybe where there may be some bright spots. How should we be thinking about that?

Frank Sullivan, CEO

Sure. So, first of all, it doesn't behoove anybody to do forecasting with an optimistic outlook. And so I think our assumptions of April and May being down 15% to 20% had been done appropriately with a negative conservative cast, but it's literally hard to tell from day-to-day. We will have spikes in some of our construction products businesses over a couple of day periods because of order flow that looks really good, and then you'll see some slowdowns. The things that are pretty certain will be the negative impact of multi-week shutdowns. Most of this is outside of the United States. Probably a little less than half of our manufacturing facilities in Europe are closed, and I won't get into all the details, but it's an interesting mix. We had a plant in Norway closed that’s now reopened. Interestingly, our primary plant in Italy is now reopened. But we have plants in the UK, in various parts of the continent that are closed by government mandate for a period of weeks. We are also closed in our two major plants in India, and almost every manufacturing facility in Latin and South America and in South Africa. There're a few other locations but they're so small as to be inconsequential. As Rusty said, when you add that all up on an annualized basis, it's about 6% of our revenues. So it's not big. The impact of reopening will determine whether we're at the bottom end of that range and the top end of that range. I think the good news for us is we're not yet seeing the underlying demand disruption that exists in some industries. Obviously, the hospitality industry has challenges, but even the auto assembly industry has got some challenges now that around the demand side that will be challenging. We're not seeing that yet. We are very aware of the possibility for that in one primary market, which is oil and gas, and across our Performance Coatings Group that's a little more than $200 million of annualized revenue. Our expectation is in the coming quarters and year, that's an area that will be under pressure. Hopefully that's responsive to your question.

John McNulty, Analyst

Yes, that's definitely helpful. Shifting gears a bit to the MAP to Growth cost-cutting programs, could you provide clarity on the progress? You mentioned that wave 1 would yield full-year benefits this year, and that wave 2 would contribute significantly, with wave 3 planned for next year. Can you update us on your status in those areas, what benefits are already secured, and what percentage might be delayed at this point? How can we think about that?

Frank Sullivan, CEO

From my perspective, the coronavirus pandemic has had a significant impact on everyone. Relating this to the MAP to Growth initiative, there are both positives and negatives. The negative aspect is that, as evidenced in this quarter and the previous ones, our planned activities and execution have been effective, but we recognized that improvements in working capital would materialize later in the cycle, and you are beginning to see those now. It's somewhat disappointing that the MAP to Growth program, while showing benefits, is facing disruptions. Conversely, there have been instances where the timing has worked in our favor. Our cash conversion cycle is stronger than ever, and we have achieved nearly two-thirds of our goals for MAP to Growth, especially in manufacturing and global purchasing centralization. However, we have accomplished less than two-thirds in general and administrative areas since a significant part will only be completed after finishing our ERP implementations. The areas that face the most disruption are the integration of continuous improvement practices in our smaller and medium plants and the ERP implementations set for the next 12 to 15 months, which may be delayed as they often require physical presence. Nonetheless, the gains we have secured are solid and will continue to benefit us. March's performance reflects our ongoing trends, although we anticipate disruption in April and May. From what we observe, April and May are likely to be the most adversely affected two-month period due to government-mandated shutdowns and business interruptions. It will be interesting to see how the economy reopens this summer, both globally and within the United States, with variations by state in terms of sector and pace.

Frank Mitsch, Analyst

I appreciate the information on the expected declines in April and May, and it's clear your year began on a strong note. What are your assumptions regarding housing starts and commercial construction activity in April and May that are leading to that 15% to 20% sales decline?

Frank Sullivan, CEO

So, I can't answer that question. We haven't gone from a macro perspective into that. What we have done is talk to each of our businesses. We've looked at the affected plants globally. We have had some affected plants in the United States. Not surprisingly, they’ve principally been manufacturing facilities in the New Jersey - North Jersey area of kind of Metro New York and we had shutdowns. We've quarantined people. We’ve closed the plant. We’ve disinfected and cleaned it and brought people back. So, we've been through that cycle, and it's not a good cycle to go through. But when you've done it once or twice, you begin to develop a rhythm of understanding the quarantine time, the cleaning process and getting people back to work. What we really have done is a bottom-up company-by-company and an assessment of their sales force. So in the consumer DIY areas, there's not only been more people at home, but at least temporarily there seems to be a shift from contractor do-it-for-me to DIY and that will benefit our consumer DIY businesses for instance. The only element of our consumer DIY business that's impacted by residential new construction would be the caulks and sealant segment of our DAP business. We haven’t done an analysis of what that means, but that's the area in consumer that would be impacted. The Construction Products Group continues to see spotty cycles of big order flow and roofing projects and then stops in our Performance Coatings Group. We're building a solid, with good customer bases in tech, food and beverage, areas that will, I think, perform well through this but some of that's being put off. And so I'm not answering your questions specifically other than to say that we have done this bottom-up business unit by business unit and trying to understand the order flow and the impact. And as I said earlier, I think the only big market that we're very concerned about as a real challenge coming is oil and gas.

Frank Mitsch, Analyst

I understand the challenges you're facing. You mentioned gaining market share in the Consumer business, and I'd like to hear more about that. Also, regarding consumers, are you receiving any immediate data on how social distancing is affecting home centers and hardware stores? Despite DIY being a favorable trend, I'm aware that wait times at Home Depot have significantly increased. Are you noticing any negative effects on your business from this?

Frank Sullivan, CEO

I'm sure, the answer to that is yes. We wouldn't talk about individual customers, but some customers have instituted more rigorous regiments of how many people they'll let into their stores. Interestingly enough our online orders are through the roof. And so, in certain product categories, where we might get 40 or 50 online orders a week, it could be hundreds or 1,000. And so, we're fulfilling that and that is through our major retailers to a lesser extent. We actually do more online business through a number of our major retail customers than we do through Amazon. Our Amazon business is growing. And then in Europe, as part of our consumer DIY business, which has been more negatively impacted, particularly in the UK than in the U.S. because of some temporary business shutdowns, we have a business called Watco which is kind of an MRO. It was a catalog. Now it's an MRO online catalog business. And their business literally over the last month is up almost 100%. It's a smaller piece of that, but you're seeing a shift to online as well. All-in-all through March, we had a high single-digit, low double-digit POS across the entirety of our Consumer segment customer base.

Rosemarie Morbelli, Analyst

Thank you. Good morning, everyone. Frank, could you provide some insight on the lower capital expenditures? What do you expect the amount to be by year-end, and which projects are being removed?

Frank Sullivan, CEO

So, our goal this year was to spend about $180 million in CapEx. I think when we finished the year, we'll be closer to $150 million. Notably, with a really strong cash flow through 9 months, that included a year-over-year higher level of CapEx of about $20 million. So, that gives you a sense of the strong cash flow that we're generating. For next year, our preliminary budgeting was about $150 million in CapEx. And at this point in time, I think we compare that back by $25 million or $30 million, without negatively interrupting our MAP to Growth the program or the areas that we're growing. And if need be, depending on circumstances, we compare that back further, but that's our current plan.

Rosemarie Morbelli, Analyst

Okay, thanks. When discussing most of your facilities operating in the U.S. or North America, what is the capacity utilization? They are operational, but how much business is coming from those locations?

Frank Sullivan, CEO

It's quite difficult to specify, Rosemarie. As mentioned in Rusty's comments or our press release, it really depends on the specific business context. For instance, in smaller projects related to paint, patch, and repair, especially in our cleaning categories, we have several products such as Krud Kutter industrial and a Mean Green anti-bacterial product that are performing exceptionally well. We have three cleaning products under Rust-Oleum that are certified for cleaning surfaces in relation to COVID-19, and their demand is skyrocketing. The challenge we face is sourcing raw materials, but we are managing to keep going. On the other hand, our marine coatings segment, which is a smaller part of our Specialty Products Group, generates around $25 million in revenue. While we typically don't discuss the sizes of strategic business units, it's worth noting that a significant number of large marine product retailers and shipyards involved in the repair and maintenance of yachts and boats are currently closed. Consequently, this segment may see revenues affected by as much as 50% at this point. However, this impact is temporary, and the duration of this situation will become clearer over the coming weeks or months.

Rosemarie Morbelli, Analyst

And if I may sneak another one in. With Q4 revenues down 15%, what could be the impact on your bottom-line and that is linked to the marine business being down 50% and I think if I am not wrong, that it has a very high margin?

Frank Sullivan, CEO

Certainly. We are currently suspending guidance, as Rusty mentioned. At this time, we are focusing on reducing expenses, deferring some expenses, and cutting back on capital spending, while also utilizing provisions from the CARES Act relevant to larger businesses. One example includes deferring FICA taxes. We are exploring options like these to enhance cash flow generation, which is our primary objective. I believe the MAP to Growth program will enable us to achieve improved bottom-line income despite revenue declines. However, we are not in a position to discuss earnings, earnings per share, or any projections for the quarter.

Steve Byrne, Analyst

What's the time lag and frequency by which you receive sales data from the big box home centers on your consumer products and let me just see how you answer that one first?

Frank Sullivan, CEO

Sure. I'm pretty certain that in most categories our consumer businesses get that information on a weekly basis.

Steve Byrne, Analyst

And can you tell whether or not the home centers are placing orders for inventory restocking that's commensurate with that or do you sense any change in stock levels as they look forward into these next couple of months?

Frank Sullivan, CEO

It truly is a week-by-week situation. Your question is very relevant to what we are monitoring. There are some new dynamics for all of us as we adapt to remote work. We hold a senior leader meeting every other day to discuss COVID infections, if there are any. Luckily, our statistics indicate that cases are few and sporadic, primarily in the New Jersey area. We also discuss how this impacts our operations and the order flow, which gives us valuable insights. The situation is very variable. Some of our retail customers are experiencing strong point-of-sale performance in early April, while others are seeing lower levels compared to March, which we believe is more about their intentional choices to limit store traffic than actual demand. Lastly, as I mentioned earlier, the situation is quite inconsistent. We are selling all the cleaning and disinfecting products we can produce, and this is true for our Legend Brands business as well. By July, we expect to have a clearer understanding of the different DIY product categories and what is driving the sales.

Josh Spector, Analyst

Just on the raw material front, you guys talked about more moderating raw material inflation, not necessarily declines. I was wondering if you could provide some more color on where you're seeing increases? And related to that, if oil kind of stays where it is, which I know is a big if, what point would you start to expect to see some of those savings flow through the P&L?

Frank Sullivan, CEO

It's a great question. Initially, we observed some tightening in specific raw material categories, leading to some pricing pressure. One of those categories was silicones, but the pricing pressure and availability in that area seem to have improved. Conversely, over the past year, metal packaging has been an exception to the trend of raw material deflation, but I expect that, due to current global circumstances in certain categories, we might finally see some relief there. The situation varies across different categories. It's clear that if oil prices stabilize at a certain level, there will likely be decreases in costs for some solvent and resin categories compared to where we are now.

Arun Viswanathan, Analyst

I just wanted to understand, I guess, when you look at your commentary that some of your international locations are closed. So should we expect, I guess, the greatest decline in your Q4 sales in both Construction Products and industrial? Is that the right way to think about it?

Frank Sullivan, CEO

Yes. Our Performance Coatings Group and Construction Products Group, which includes what was formerly our Industrial segment, have the most exposure to markets outside of North America and Europe. These segments have been experiencing weak demand, which we've been highlighting for the past year. While there have been some positive developments in the last couple of quarters, nearly half of our European operations have faced closures at various times. The level of government-mandated closures in several European countries has been more severe than what we've observed in North America. This trend is also evident in Latin America and India, primarily affecting our Performance Coatings and Construction Products Group businesses.

Kevin Hocevar, Analyst

Thank you for fitting me in. The coronavirus has affected the U.S. and various locations at different times and to varying extents, with states responding differently regarding the prohibition of construction activities. Do you have any insights on which states are the most restrictive for construction, such as New York and Michigan? How are your construction end markets performing compared to regions with fewer restrictions? I'm interested to know if you can provide visibility and differentiate the conditions across different regions.

Frank Sullivan, CEO

Sure. For the most part, construction activity in general and particularly as it relates to infrastructure is up and running throughout North America. Most states are following the Department of Homeland Security guidelines which qualify construction activity as essential. The state that I'm aware of, and this could be different than other places, the state that I'm aware of that had the harshest focus on construction was Pennsylvania. And the construction industry worked with the Governor's office to talk about PPE protocols and social distancing and what was happening in other states. Within a week or 10 days, the original halting of construction activity in Pennsylvania was eased. I believe now Pennsylvania is following the Department of Homeland Security guidelines on construction. We saw a similar order in Quebec Province of Canada and that has also been eased somewhat. The rest of North America, as far as I know, sitting here today is allowing construction activity as long as there is a maintenance of certain PPE and social distancing protocols. In a number of our areas, it's truer than most. When you're doing roofing activity or you're in the USL business and your activity is outside or outdoors, I think there is less concern. If you're doing flooring work and you can maintain all those protocols, again, I mentioned it's a spiky business. One of the reasons we're seeing spiky business in that business activity is it requires the shutdown of a manufacturing operation to get in and do rehab and/or replacement of floors. Whether it's manufacturing facilities, institutional facilities and in particular for roofing, schools and universities, those all have closure areas that are allowing for some of the construction activity that we do. And so, we'll see whether that's been beneficial for us or perhaps is pulling some summer work into the fourth quarter. But it's very spiky and we'll report the results in July when we have our fourth quarter results final. Thank you very much, Vanessa. I'd like to thank our associates around the world for their efforts. They have continued to grow the business while carrying out our MAP to Growth restructuring program very effectively. Now they're demonstrating incredible resilience by also finding ways to protect their health, support their communities and maintain our business operations. In particular, I'd like to thank the men and women who courageously show up to work every day in our manufacturing facilities and distribution centers. These frontline associates are keeping RPM running to the benefit of all of our associates, our customers and our shareholders. We look forward to updating you on our fiscal 2020 fourth quarter and year-end results in July. In the meantime, we'd like to thank you very much for being on today's call and we wish you and your families happiness and good health as we all manage through this extraordinary time. Thank you for participating in our call today and have a great day.

Operator, Operator

Thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.