Earnings Call Transcript
RPM INTERNATIONAL INC/DE/ (RPM)
Earnings Call Transcript - RPM Q4 2023
Operator, Operator
Good morning and welcome to the RPM International's Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. Please note that 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, sir.
Matt Schlarb, Senior Director of Investor Relations
Thank you, Joe and welcome to RPM International's conference call for the fiscal 2023 fourth quarter and full year results. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chairman and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller, and Chief Accounting Officer. This 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 fourth quarter of fiscal 2022 unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentations and Webcasts section of the RPM website at www.rpminc.com. At this time, I would like to turn the call over to Frank.
Frank Sullivan, Chairman and CEO
Thanks, Matt. Good morning everyone. For those following the slides I'm going to start with slide three. We'll begin by discussing our high-level performance for the fourth quarter, after which Mike will provide details on our financial results, and Matt will provide a balance sheet and business update. Finally, Rusty will conclude our prepared remarks with our outlook after which we'll be pleased to answer your questions. Starting on slide three, you can see that in the fourth quarter we generated the sixth consecutive quarter of record sales and adjusted EBIT on top of the strong growth we achieved in the fourth quarter of last year. Importantly, we achieved these record results, at the same time we generated record fourth quarter operating cash flow. In a time of economic uncertainty, we prioritize cash flow generation over P&L management, which resulted in cash flow from operations of $314 million, primarily through initiatives to normalize inventories and benefits from our MAP 2025 initiative. The strong cash flow allowed us to reduce debt by nearly $140 million during the quarter. Moving to slide four, the agility of our businesses demonstrated played an important role in achieving these record results. For example, several of our businesses repositioned to focus on engineered solutions for infrastructure and reshoring projects, which are the fastest-growing sectors in the construction industry. Our strategic focus on maintenance and repair, our differentiated service model, and the agility of our sales teams to find pockets of growth helped offset a decline in other new build construction sectors where volume declines were compounded by customer destocking. We have also improved our operational agility through our MAP 2025 program so we can quickly respond to demand changes. In our consumer group, our customers were holding leaner than normal inventories heading into the warm months when demand usually picks up. As is typical, there was an increase in consumer takeaway late in the quarter and we were able to quickly fill these orders. Destocking was the driver of volume declines at our Specialty Products Group, particularly in businesses serving OEM manufacturing. We faced additional profitability headwinds in this segment from continued cost inflation, FX, and initiatives we put in place to normalize our inventory which had a particularly pronounced impact on the SPG profitability. Turning to slide five. Looking at sales by geography. Sales growth was strongest in emerging markets where growth ranged between high single digits to high teens despite foreign currency headwinds. These regions are investing significantly in infrastructure in an area that we are well-positioned to serve. Europe declined nearly 2%, but excluding FX headwinds, Europe grew in the quarter, the first sign of improving performance after more than a year of challenging economic conditions. Despite the challenging second half, fiscal 2023 was a solid one for RPM with sales up 8%, driving adjusted EBITDA nearly 19%. We finished the year with improving results in our Construction Products Group and in particular the Tremco Roofing division improving performance in Europe. The challenges of supply chain disruptions and customer inventory destocking are mostly now behind us; and finally an improving cost price/mix dynamic with major raw materials cycling down from historic highs. These dynamics indicate a strong start to our new fiscal 2024 year. I'd now like to turn the call over to Mike to cover our financial results in the quarter in more detail.
Michael Laroche, Vice President, Controller, and Chief Accounting Officer
Thanks, Frank. Starting on slide 6. Consolidated sales increased 1.6% to $2.02 billion, which was a fourth quarter record. Organic sales growth was 2.6% or $51.1 million, and acquisitions net of divestitures contributed 0.4% to sales or $8.4 million. FX decreased sales by 1.4% or $27.2 million. Consolidated adjusted EBIT was a fourth quarter record and increased 1.5% to $267.8 million. The growth was driven by sales increases, MAP 2025 benefits and consumer margins recovering towards historical averages following the supply chain disruptions of the prior year. We also took cost reduction actions in the fourth quarter in businesses with declining volumes, primarily in the SPG and CPG segments. While these actions had a modest impact on Q4 profitability they will have a more pronounced impact going forward. Adjusted diluted earnings per share were $1.36 compared to $1.42 in the fourth quarter of 2022. The decrease was primarily driven by higher interest expense. Turning to segment results on slide 7. Our Construction Products Group achieved record fourth quarter net sales of $748 million, up slightly from the prior year period. Organic sales growth was 0.8% with acquisitions contributing 1% and foreign currency translation reducing sales by 1.5%. Sales growth was led by pricing increases and strength in concrete admixture and repair products, which benefited from infrastructure and reshoring related capital spending. Demand increased for restoration systems for roofing facades and parking structures, which benefited from its strategic focus on repair and maintenance differentiated service model. Demand was weak in new residential and certain commercial construction sectors, which included the negative impact of customer destocking. Adjusted EBIT was $124.5 million, an increase of 1.7% from the prior year period. Pricing increases and MAP 2025 benefits more than offset reduced fixed cost leverage from lower volumes and internal initiatives to reduce inventory. As I mentioned we took cost reduction actions in CPG in the fourth quarter. On the next slide, the Performance Coatings Group achieved another quarter of record net sales and adjusted EBIT. Revenue increased 8.8% to $358.4 million. Organic sales grew 10.4%, acquisitions added 0.9% and foreign currency translation was a 2.5% headwind. Sales were driven by strong demand for the segment's engineered solutions for infrastructure and reshoring capital projects. Increased pricing and energy demand also contributed to the segment's growth. Adjusted EBIT increased 21.5% to a fourth quarter record of $51.7 million. The growth was driven by strong sales and MAP 2025 benefits. These results are on top of a strong prior year increase when adjusted EBIT grew 37.3%. Turning to slide 9. Specialty Products Group sales declined 14.3% from the prior year period to $193.4 million. Organic sales declined 12%, divestitures net of acquisitions reduced sales by 1.8% and foreign currency translation was a headwind of 0.5%. OEM demand was weak during the quarter due to a reduction in customer manufacturing activity, which was compounded by destocking. This segment faced a challenging comparison to the fourth quarter of fiscal 2022, when our disaster restoration business had strong sales as it made progress in resolving its microchip supply chain issues. During that quarter, SPG sales increased 11.4%. SPG also faced more challenging comparisons from the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023. SPG adjusted EBIT was $16.3 million or a decline of 63.1% compared to the prior year period. Unfavorable product mix and lower fixed cost leverage drove the decline and a $3.4 million expense related to the resolution of a legal matter also negatively impacted adjusted EBIT. Since SPG has the highest concentration of intercompany sales, it was most impacted by RPM's inventory normalization initiatives. We also took cost actions to align resources with demand levels during the quarter. Moving to slide 10. The consumer group grew sales 4.9% to a fourth quarter record of $716.4 million. Organic sales increased 5.6%, acquisitions contributed 0.3% and foreign currency translation was a headwind of 1%. The Consumer Group sales benefited from pricing increases in response to continued inflation. Volumes declined as consumer takeaway was lower in the quarter. However, as Frank described earlier, our ability to quickly respond to increased demand at the end of the quarter helped limit the volume declines. Additionally, we had some market share wins as we returned to playing offense. We gained shelf space in aerosol paints and abrasives. And over the summer, we expect to continue to offer new products and innovation to the market. Adjusted EBIT increased 30.4% to $104.7 million. The successful implementation of MAP 2025 initiatives, as well as solid sales increases were key drivers of the increase in profitability and resulted in margins approaching historical averages following the supply chain disruptions of the prior year. Now, I'd like to turn the call over to Matt to go over the balance sheet and cash flow and provide a business update.
Matt Schlarb, Senior Director of Investor Relations
Thank you, Mike. As Frank mentioned earlier, we prioritized cash flow during the quarter and the progress can be seen in our results on slide 11. We continue to make progress in reducing inventory both from inventory management and also structural improvements enabled by MAP 2025. We reduced inventories by $205.8 million in the fourth quarter. This played an important role in generating record fourth quarter cash flow from operations of $314.1 million during the quarter versus $22.8 million in the prior year, and we were building inventories to add resiliency to our supply chain. We funded these investments in our supply chain with debt so as working capital improved we reduced debt by nearly $140 million during the fourth quarter. We also have continued to return cash to shareholders during the fourth quarter. We paid $54.1 million in dividends and $12.5 million in share repurchases bringing our full fiscal year total in these two areas to a combined $263.9 million. Moving to slide 12. We've spoken several times about how our businesses are well positioned to provide engineered solutions for infrastructure projects, and I'll highlight a few of them. In Europe, the continent's busiest train station, the Gare du Nord in Paris selected CPG's Flowcrete flooring systems for repairs in advance of the 2024 Olympics because of its durability, easy maintenance and ability to be installed during the six hours the station is closed each day. At a hydroelectric plant in Manitoba, PCG's Carboline fire protection system was chosen because its two-component epoxy intumescent fire-resistant material required specifications that were able to be applied off-site and can withstand the variable weather conditions of Northern Canada. In Australia, CPG Tremco was selected to repair and waterproof the Sydney Harbor Bridge tower because of its ability to provide a membrane waterproofing system that can be installed in a variety of temperatures, cure within an hour of installation and has weather resistance. This slide shows a few examples of the many projects where we have provided engineered solutions for infrastructure projects. We expect to continue benefiting in fiscal year 2024 as global investments in building and maintaining infrastructure grow. Now, I'd like to turn the call over to Rusty to cover the outlook.
Rusty Gordon, Vice President and Chief Financial Officer
Thanks, Matt. We'll start on slide 13. As we look forward to the first quarter, many of the demand trends we saw in Q4 are expected to continue. Pricing is still expected to be positive, but with a lower year-over-year impact than this past fourth quarter as we lap some of the larger pricing increases implemented last summer. From a profitability standpoint, MAP 2025 benefits are expected to continue, while several Q4 headwinds including FX, customer destocking, internal inventory normalization initiatives and inflation are expected to abate. Taking all this into account for the first quarter, we expect consolidated sales to increase in the low single-digit range and adjusted EBIT to increase in the high single-digit range. This would represent the seventh consecutive quarter of record sales and adjusted EBIT and is on top of a strong prior year comparison, when sales grew 17% and adjusted EBIT increased 33%. For sales by segment in the first quarter, CPG is expected to increase in the low single-digit percentage range. PCG is expected to increase in the mid-single-digit percentage range. SPG is expected to decrease in the high single-digit percentage range and consumer is expected to increase in the low single-digit percentage range. Moving to slide 14, as we think about the full year demand visibility remains limited and volatility by end-market makes longer-term forecasting challenging. That being said, our expectation is that our focus on repair and maintenance and strong position providing engineered solutions for reshoring and infrastructure projects will be able to offset potential weakness if there is a downturn in commercial construction sectors. Additionally, we expect to leverage our MAP 2025 initiatives to help expand margins. Our current expectation is there will be modest economic growth and we will achieve consolidated sales growth in the mid-single-digit range and adjusted EBIT growth in the low double-digit to mid-teen percentage range. Growth is expected to be strongest in the second half of the year, aided by less challenging comparisons as much of the unfavorable impact of destocking occurred in the second half of fiscal year 2023. This outlook assumes that we will not enter a recession and that FX and inflation pressures will continue to ease. By segment, we expect the following for fiscal year 2024. At CPG, we expect continued share gains in concrete admixtures, continued momentum in roofing and stabilization in the residential sector with continued uncertainty in commercial construction. Once again, we benefit from our focus on reshoring infrastructure as well as on building maintenance and restoration. At PCG, we expect continued momentum driven by strength in reshoring, infrastructure and energy markets, even as the segment faces challenging comparisons after a year of strong growth in fiscal year 2023. We expect SPG to benefit from easy comparisons in the back half of the year as destocking headwinds abate and demand stabilizes. At Consumer, we expect the volume decline from the prior year to stabilize in the second half of the year with a continued benefit from pricing, but at a lower level than fiscal year 2023. The outlook I just provided is prior to a business transfer that we made effective at the beginning of fiscal year 2024. On June 1st, 2023, a few international businesses that had previously been a part of our CPG segment transferred to the PCG segment. This impact is relatively small, with about $100 million of annual revenue shifting from CPG to PCG. In October, you'll see this change reflected in our Q1 FY 2024 reporting, and we will provide the recast prior period financials for ease of comparability, starting in the first quarter of fiscal 2024. Again, the outlook I just provided is on the old basis. This concludes our prepared remarks. We will now be pleased to answer your questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question will come from John McNulty with BMO. Please go ahead with your question.
John McNulty, Analyst
Good morning, Frank. Thanks for taking my question. Congratulations on some really solid results. And I guess, one of the things I wanted to dig into to maybe better understand it a bit was I guess, when you were coming into this quarter there were expectations for the construction business to be under a reasonable factors that putting up better sales than expected and as a result a better total numbers. I guess – can you help us to think about what was different from what you expected in terms of – was it just demand was stronger in certain sectors, or was the destocking less and you got better clarity on that as things kind of progress? I guess – how would you characterize the beat in construction relative to your original expectations?
Frank Sullivan, Chairman and CEO
Sure. I think it has to do with things that we've been talking about starting in the second quarter and certainly experience in Q3, and the destocking that we experienced what Rusty was calling the bullwhip effect of inventory was more pronounced across more of our businesses and segments than we had ever seen including construction products. And quite honestly, I think there was some hesitation once we made significant improvements in our inventory position. There is certainly more to come in the coming years but a big chunk of it happened this spring. And as the destocking more normalized inventory levels across most of our businesses, but in this case particularly in the distribution channels of construction products. And so as weather improved and economic activity picked up and also kind of our normal seasonal pickup in the Roofing division related to schools, as schools let out in May and early June, all resulted in a stronger finish, which seems to be continuing in the early parts of the summer. So the strength in Q4 really occurred towards the end of the quarter in our Construction Products business. And I think the destocking levels to more normalized or in some cases skinnier than usual inventory, not only construction products but other parts of our business are starting to show up in a positive way.
John McNulty, Analyst
Got it. Okay. No that's helpful and clear. I guess the second thing I wanted to just dig into was raw material deflation. It looks like it's kind of increasing or accelerating theme across the space. I guess, you guys are on a FIFO accounting method, so it takes a little bit longer to roll through. I guess, can you help us to think about raw material deflation in your fiscal 2024 guide and how that progresses as you kind of go through the year?
Matt Schlarb, Senior Director of Investor Relations
Sure, John. Yes this is Matt. So as we think about what we expect to see in the first quarter we'll probably have a little bit of benefit on our P&L from raw material deflation. And then as we move throughout the year, we're expecting it to be down in the mid-single-digit range. Now that's just for materials. We still have rising inflation in things like labor and some of the raw materials like packaging and TiO2 are sticky but that's how we're looking at it and that's included in our forecast for the year.
Frank Sullivan, Chairman and CEO
So I would add two more elements to that, John. One is as we experienced, and this has been typical for us in our industry, there is a lag as raw materials increase particularly, as dramatically as they did between the time of the increase and when we can get price. And then as that cycle comes down, we begin to pick up lost margin. And so we are at the beginning stages of that. Just to pick on one of our segments consumer, we still aren't back to pre-COVID levels of margin activity. So there's more to come in recovering those margins. Secondly, we'll continue to see gross margin improvement not only from cost price mix relative to improving raw material costs, but also from our MAP benefits which are real and had really good benefits for fiscal 2023. We'll continue with $120-some million or more in fiscal 2024. And they were masked in the second half of the year by lower volumes and the unabsorption hits we took in the second half of fiscal 2023 by deliberate production shutdowns and inventory adjustments. And so those two things should combine to demonstrate some pretty solid gross margin improvement in fiscal 2024.
John McNulty, Analyst
Great. Thanks very much for the color. I will get back in queue.
Operator, Operator
Our next question will come from David Huang with Deutsche Bank. Please go ahead with question.
David Huang, Analyst
Hey, great. Good morning. Just on commercial construction, I guess, do you think the commercial construction activities hit the bottom? And I guess when do you expect those will recover?
Frank Sullivan, Chairman and CEO
Yes, we currently lack detailed insight into that situation. We are seeing the same news reports as everyone else regarding the tightening in the banking and regional banking sectors, which have been crucial for providing credit to commercial construction projects. Therefore, our guidance does not expect any increase or recovery in commercial construction activity at this time. As I mentioned earlier, our sales teams have adapted to focus on where spending is occurring, and the usual maintenance and repair activities in our Construction Products Group and roofing and façade restoration are starting to recover. This is largely influenced by different funding sources and decision-making processes in commercial construction. We don't have clear visibility on that front, but we do not foresee any uptick in commercial construction, whether in hospitality or office spaces, in the near future.
David Huang, Analyst
Okay. And then I guess for the full year guidance I know you're not assuming a recession. But if there is a mild recession I guess there's MAP. Can you comment on if there is any additional levers that you can pull to maybe achieve the low end of your guidance?
Frank Sullivan, Chairman and CEO
Sure. We have very deliberately invested in growing SG&A in a number of our businesses in particular consumer. I know that's a concern of some folks. I can tell you just an example advertising promotion and marketing activities in Q4 was up 70% from last year. Keep in mind last year was abnormally deflated because we had some supply chain challenges and there was no point in advertising or promoting to drive people to stores or the activity that we couldn't supply sufficiently. For the full year that category is up 54%. And so we are rebuilding across a lot of our businesses and in particular consumer those promotional advertising and marketing dollars. There are other discretionary areas where as the year progresses we see economic challenges beyond what we anticipate we can cut back. And so that's certainly there. I will tell you that in certain of our businesses, commercial construction that we just talked about in OEM, particularly, the OEM businesses that we serve in doors, kitchen cabinets, things that go into the housing market last four or five months in terms of volume sure feel recessionary to us. So hopefully that hit is being mitigated and we're starting to come out of it. Contrary to commercial construction, one area of positivity as we progress throughout the year though we're not seeing it yet is a pickup in residential construction which was a headwind for us for most of 2023.
David Huang, Analyst
Okay. Thank you.
Operator, Operator
And our next question will come from Mike Harrison with Seaport Research Partners. Please go ahead.
Mike Harrison, Analyst
Good morning, Mike. Hi. Good morning. Congrats on a nice finish to the year. I wanted to follow up on your comments there on the resi construction. You called out a potential stabilization in residential markets as a positive for 2024. Can you give a little bit more color on the trends that you're seeing in your residential business, I guess, as it relates to both the new resi side, as well as repair and maintenance and small projects?
Frank Sullivan, Chairman and CEO
We've become more involved in residential new construction, particularly with Nudura, which has a significant presence in ICF in Canada and is expanding in the US. We faced challenges throughout the year, especially starting in the middle of summer last year as residential construction decreased. The situation resembled a value trap, with people hesitant to sell their homes due to rising interest rates and the fear of paying higher prices for new homes. This led to a slowdown in housing turnover. However, looking at long-term trends, we see a mismatch between the rate of residential construction and demand. We believe this will improve, especially as we move into 2024 with easier comparisons for high-profit product lines like Nudura and the related sealants and coatings. Additionally, the homebuilders’ expectations for an increase in new residential starts should benefit us as well.
Mike Harrison, Analyst
All right. And then I guess maybe if you can give a little bit more detail on what's going on in your specialty business. This is where you seem to be seeing a lot of customer destocking also where you're seeing the heaviest internal destocking and fixed cost impact. Can you maybe just help us understand when those impacts are expected to stabilize or normalize?
Frank Sullivan, Chairman and CEO
Certainly. Our OEM sector typically supplies products for the residential housing market as well. We continue to produce wood stains and finishes used in doors and kitchen cabinets. We have a strong partnership with Amish Woodworking, which serves the residential market through furniture and specialty wood. We've also been involved in the RV sector, which surged during COVID but saw a significant decline over the past year. All these areas have experienced notable downturns. DayGlo, part of our Specialty Products Group, functions primarily as a supplier of specialty chemicals. Given the current deflationary trends in raw materials, we are facing similar negative impacts as seen in the broader chemical market. Additionally, we sold the Guardian furniture warranty protection business earlier this spring, which represented about $20 million in annual revenues. Although this was a high-margin business, it wasn't central to our operations at RPM, and we've found a suitable new owner for it. This divestiture will reflect a $20 million revenue loss next year, but the margins were significantly higher than the average in our Specialty Products Group.
Mike Harrison, Analyst
All right. Thanks very much.
Frank Sullivan, Chairman and CEO
Thank you.
Operator, Operator
And our next question will come from Jeff Zekauskas with JPMorgan. Please go ahead.
Jeff Zekauskas, Analyst
Hi, good morning. Thanks very much. When you look at the results of PPG and Sherwin-Williams their gross margins this quarter are up about 400 basis points. And when you listen to them over a longer period of time, they're always focused on what their gross margin should be. And in the case of Sherwin, I think they want to be somewhere between, I don't know 46 and 48. And with RPM, your gross margins are up maybe close to a couple of hundred basis points this quarter. And in the old days, you used to be in the low 40s, I don't know 42% or something like that. Now you're not exactly a coatings company. Can you talk about why your gross margin expansion isn't this great? And do you have gross margin targets in the future? Can you get back to that 42% or 43% number? How do you feel about the gross margin?
Frank Sullivan, Chairman and CEO
Sure, that's a great question and it's an area of significant focus for RPM and our MAP '25 goals. First, we had to reset gross margin profitability in 2018, and we were aware of this for a couple of years prior. We were accounting for freight out differently than most of our peers, incorporating it into SG&A, which raised questions about our high SG&A. In 2018, we changed the accounting by including all freight in the cost of goods sold. On that adjusted basis, our peak gross margin, which used to be around 43%, is now about 39.8%, almost 40%. That's the correct way to view our peak gross margins after that accounting change. We have set a target of 42% in our MAP 2025 initiative, and we have a way to go. We are making good progress in the original MAP initiative but faced significant setbacks, like the entire industry, due to rapidly rising inflation and supply chain challenges. We are experiencing similar dynamics to our coatings peers, but compared to Sherwin-Williams, we use FIFO accounting while they use LIFO. Therefore, our benefits typically appear in our P&L 60 to 75 days later. Lastly, about 35% of RPM's revenues come from our Construction Products business, which is profitable but operates with different dynamics and economic cycles than more pure-play coatings companies.
Jeff Zekauskas, Analyst
Okay. Thank you for that. And then lastly, when you think about your level of inventories, the inventories really came down and benefited working capital. Are you at the right level? Do you think your inventories a year from now will be higher or lower, or it's just too difficult to tell?
Frank Sullivan, Chairman and CEO
It seems you've been involved in our strategy discussions with the Board over the past year regarding two key focus areas: gross profits and working capital. Our working capital is currently not at the desired level. Compared to our peers, we are lagging in this area. We expect to see consistent working capital improvements of 300 to 400 basis points from RPM over the next three to four years. The working capital improvement we saw this quarter indicates a shift at RPM compared to three or four years ago. We have managed to adjust production in our consumer business more effectively. We've communicated better internally and externally that while we are aware of the impact of absorption hits, making those adjustments was necessary. If we continue to absorb those hits by enhancing our operational alignment and efficiency, we expect to see ongoing improvements in working capital. This has been a topic of significant focus over the last 1.5 years with our Board. The benefits from the MAP '25 program and the positive cash conversion cycle in Q4 are evident, but there is much more to come. Currently, we are still behind our peers by 300 to 400 basis points in this area.
Jeff Zekauskas, Analyst
Great. Thank you, so much.
Frank Sullivan, Chairman and CEO
Thank you.
Operator, Operator
Our next question will come from Vincent Andrews with Morgan Stanley. Please go ahead.
Vincent Andrews, Analyst
Thank you. Good morning everyone. Just wanted to tie together your comments about the consumer demand picking up sort of seasonally as the quarter progressed. Can you give us a little color as you have in the past about what you're seeing in terms of point of sale versus what you're actually selling in? And just help us understand if the point of sale is improving I think last quarter you said it was still running down low to mid-single digits but sort of is that is that gap narrowing between what your customers are doing and what their customers are doing?
Frank Sullivan, Chairman and CEO
Sure. The last unit volume sales that were positive were in the first quarter of last year. And we experienced negative unit volume or negative consumer takeaway in most of our consumer product lines and businesses throughout the rest of fiscal 2023. And it was high single-digits or low double-digits this spring. Part of it was a function of consumer takeaway and changes in consumer spending patterns. Again things you can read about headlines about more experiences and less DIY stuff post COVID. Part of it was aggressive destocking and/or inventory adjustments within our supply chain relative to the supply chain disruptions and inventory challenges in all types of areas including for our consumer businesses. And so I think by the time we got into the spring a lot of that customer inventory destocking or rightsizing and a lot of our own supply chain issues were behind us. It doesn't mean we won't see those things in the future relative to supply chains that have happened in consumer. But a lot of that corrected. And while consumer takeaway was still negative in the fourth quarter it was improved from the last product from the two prior quarters. So, we're seeing the consumer week-by-week picking up and I would expect us to be positive sometime this fall in part because of what we're seeing in part because of the new products we're introducing, some market share gains and also we'll be annualizing some easier comps in terms of negative consumer takeaway.
Vincent Andrews, Analyst
Okay. And if I could just follow up on the 2024 fiscal 2024 sort of the shape of the year and maybe if you want to comment on specific segments it seems like that there's going to be kind of a bit of a handoff between the residual price that's in the system the residual destocking maybe in the first half of the fiscal year? And then the back half of the year it seems like you're anticipating more of a volume recovery and then less pricing and then presumably to the EBIT line you're going to see more of the deflation that we've been talking about. Is that the right way to think about the shape of the fiscal quarter?
Rusty Gordon, Vice President and Chief Financial Officer
Yes, that's right Vincent. This is Rusty here. The first half of fiscal 2023 we obviously have more difficult comps with sales up double digits and EBIT up in the mid-30% range in the first half of fiscal 2023. We did suffer of course as well in the back half of 2023 from the under-absorption as we made a conscious effort to throttle back production. So, as a result yes we do expect as fiscal 2024 goes on that we will see pickup in the growth as we face some easier comparisons.
Vincent Andrews, Analyst
Thank you very much.
Operator, Operator
And our next question will come from Steve Byrne with Bank of America. Please go ahead with your question.
Steve Byrne, Analyst
Good morning Frank. This $100 million of sales of businesses between CPG and PCG what's the logic behind that? And maybe more broadly given both of those segments benefit from reshoring and infrastructure is there potential logic in combining them having at least at a commercial level where you could potentially drive more cross-selling between these businesses within the two segments? What do you think of that?
Frank Sullivan, Chairman and CEO
Sure. And again another really kind of sharp strategic question. So, particularly, in the developed world, PCG, our Performance Coatings Group and our Construction Products Group had relatively small and needing more investment operations in places like the Middle East, elements of Africa, India, and Southeast Asia. And rather than go it alone, what we've done is taken a platform approach. We have a particularly sharp management team out of South Africa, the leader there is a gentleman named Grant Boonzaier. He is a PCG leader runs their platform group. But because of the dynamics there and his success and the success of his team, they have become the platform in South Africa for Rust-Oleum that had a business there for our construction products group so Tremco and Euclid concrete repair products. And then the original businesses that they've had there for many years which were Carboline and Stonhard. We've taken that model and again Grant is part of PCG, and we have taken the construction products group businesses in the Middle East and Africa, the Construction Products group in India and the Construction Products Group business in Southeast Asia and they are operating on a more combined basis as you're suggesting in those developing countries. We are investing in new facilities in Southeast Asia and in India that will serve multiple product lines. And all of those businesses will now report to Grant Boonzaier. So they have shifted from reporting to the Construction Products group to reporting to what we consider the developing world platform approach and that's part of our PCG. So that's the primary driver of that $100 million shift in revenues. We would expect it to drive synergies on cost, synergies in a way of expanding revenues more quickly than if they operated on their own and improving unit margins there. Last comment I would make on that, this will have no effect whatsoever on our consolidated results or guidance.
Steve Byrne, Analyst
Okay. And Frank, can you remind me on in consumer, do you still provide guidance to I believe it's Home Depot as a product category leader in and maybe aerosol paint is one of them. And I ask about this are these positions that you have with them in particular categories enabling you to have more pricing power and/or enabling more share gains?
Frank Sullivan, Chairman and CEO
We have strong partnerships with all our retail customers and lead the small-project paint category across major retailers and channels, with the exception of Sherwin-Williams Paint Stores. Our role involves understanding consumer preferences and analyzing profitability, which has been consistent over the years. However, profitability is primarily driven by innovation, new products, and brand strength. For instance, this spring we are advertising Rust-Oleum's new patented five-in-one spray cap, which allows users to adjust the spray pattern. DAP has also launched several new products, including a two-component foam in a single can, appealing to both heavy consumers and professionals. Additionally, we are introducing products for popcorn ceiling spray to compete against a currently dominant supplier. Ultimately, it is our focus on innovation and strong brands that helps us maintain price levels, rather than the size of our business or customer relationships.
Steve Byrne, Analyst
Thank you.
Operator, Operator
And our next question will come from Ghansham Panjabi with Baird. Please go ahead.
Ghansham Panjabi, Analyst
Good morning, Frank. Last quarter, you described the current operating environment as a traditional recession back in April. I'm interested in your current perspective on how you would assess the situation now. You mentioned new home construction and the residential market, but are there any other categories that have improved or worsened compared to what you observed three months ago?
Frank Sullivan, Chairman and CEO
Three months ago, we were reflecting on the previous quarter, and during that time in April, consumer takeaway was in the mid to high single digits negative. For a specialty products group and our construction products group serving the residential market in North America, this felt like a recession. Except for the Specialty Products Group, we have seen improvement across the rest of our portfolio. Although consumer takeaway remains negative, the decline is much more modest compared to the five or six months prior. We noticed an uptick at the end of the quarter in our Construction Products Group, especially in the Roofing division and waterproofing. There are signs that the challenges in the residential construction market, influenced by various factors, are improving this summer, and we expect this trend to continue for the remainder of the year. Red flags are turning into yellow flags and, in some areas, even green flags, which is a much better position than we were in just a few months ago. Lastly, I want to acknowledge our operating team and our MAP program, as our ability to adapt to these changes has significantly improved.
Ghansham Panjabi, Analyst
Got it. And then as it relates to the construction segment specific to the fourth quarter and the margin upside there relative to the few quarters prior to that when they were declining year-over-year. What drove that significant increase in the fourth quarter specifically?
Frank Sullivan, Chairman and CEO
Much like my earlier comment on consumer but also here. We were within our supply chain and internally dealing with inventory challenges and destocking across our distribution for construction products and internally and that seems to have corrected itself. And I think there was some anticipation that things were moving in the right direction. The question was whether we were going to experience that in May or June. And we had a few distributors that were hinting at, a, we can boost some product if you discount. And I think we held our pricing and held our discipline. And let's say, everybody held their breath until they needed inventory and it started showing up in May. And that positive trend is continuing as we enter the first quarter.
Ghansham Panjabi, Analyst
Got it. And then just one final question. So as it relates to your fiscal year 2024 construct you're basically guiding towards 3x operating leverage relative to your sales guidance, is the delta between what you're guiding towards for fiscal year 2024 versus what you would typically have in terms of operating leverage? Is the delta purely MAP, or is it also a contribution from raw materials deflation?
Frank Sullivan, Chairman and CEO
It's a combination of both as I commented earlier. When you look at our cycle and we experienced this as our industry did we're behind the curve in terms of catching up with raw material prices particularly during this cycle as quickly as they went up. And so we are experiencing deflation versus the prior period and versus now for the first time in the prior year. But we're not back to the margin profile in a few of our businesses that we were pre-COVID. And so we've got work to do there. So a part of it will be the benefits of that cost price mix moving positively and we're starting to see that as is our industry. And the other benefits and we talked about it we're talking about MAP we're doing the right things on the ground. We talked about $120 million plus of benefits in fiscal 2023. It was hard to find. We had $50 million of unabsorbed hits in our gross profit in our P&L in the second half of last year as a result of lower volume marketwise, but also the production shutdowns to right-size inventories internally. And so those MAP benefits covered a lot of that in a rising unit volume environment, which we're working hard to get back to and hope for you'll start to see those MAP benefits add to that margin expansion. So those are the two dynamics that will drive pretty meaningful margin expansion on what we anticipate to be relatively modest revenue growth at least for the first half of the year.
Ghansham Panjabi, Analyst
Got it. Thank you, Frank.
Operator, Operator
And our next question will come from Josh Spector with UBS. Please go ahead.
Josh Spector, Analyst
Good morning, Frank.
Mike Sison, Analyst
Hi, guys.
Frank Sullivan, Chairman and CEO
Hi, Mike.
Mike Sison, Analyst
Congratulations on a successful quarter and your positive outlook. If I remember correctly, wave two represents around $160 million in MAP savings. Based on my calculations for your growth in 2024 compared to 2023, it seems to cover all your needs and more. Therefore, it doesn’t appear there’s significant deflation in that figure. It looks like you're set for some volume growth. Am I interpreting the math correctly? It suggests that your outlook might be a bit conservative.
Rusty Gordon, Vice President and Chief Financial Officer
Well, in terms of the outlook, the outlook is for volume declines to be modest in Q1 and then start to turn around as we get into Q2. And as Frank mentioned, we will see MAP benefits that we didn't see last year because they were masked by underabsorption. So for that reason, we did have an outlook where the full year is actually better in the last nine months in total compared to the first quarter.
Frank Sullivan, Chairman and CEO
Sure. I would like to add that some of our peers have experienced similar strong performance over time, but not all of them have. In the first quarter of last year, our sales increased by 17%, driven by significant unit volume growth, and EBIT rose by 33%. In the second quarter, sales were up 9% and adjusted EBIT increased by 36%. These were all-time records. We have significant challenges to tackle in the first half of this year. However, we are confident that we will achieve sales growth and EBIT growth, albeit at a more modest rate compared to last year due to the previous year's exceptional numbers. Last October, we were optimistic as unit volume growth was strong across the board and our MAP-driven leverage was impressive. Unfortunately, we faced significant declines in a couple of our businesses starting in November and December, which we discussed in January and again in the spring. I believe this is due to improving economic conditions and our more agile organization compared to four or five years ago.
Mike Sison, Analyst
Okay. Thank you.
Frank Sullivan, Chairman and CEO
Thank you.
Operator, Operator
And our next question will come from John Roberts with Credit Suisse. Please go ahead.
John Roberts, Analyst
Morning, John.
Frank Sullivan, Chairman and CEO
Morning, John.
John Roberts, Analyst
Morning. Back to the new product comments on consumer, I think, you lost some share because of the alkyd shortage during the pandemic. Do you have any data on category growth versus your growth or something that might suggest you regained some share?
Rusty Gordon, Vice President and Chief Financial Officer
Yeah. We have picked up small-project paint share at a major home center this spring. So, share has gone up for us in small project paint if that's what you're referring to.
Frank Sullivan, Chairman and CEO
We lost part of our spray paint business to Baird Home Depot last year, including the elimination of Universal, one of our top-performing products. However, we have successfully repositioned that product in other channels and have nearly recaptured what was lost during that transition. Additionally, as Rusty mentioned, we have gained shelf space with other major retailers. We're now focused on growing our consumer business again. A year ago, we faced supply chain and operational challenges that contributed to market share loss with a major customer, but those issues have been resolved. We have sufficient capacity to accommodate more business, and we're increasing our advertising and promotional spending, particularly online. We're now aggressively introducing new products, pursuing market share, and leveraging our volume more effectively than we could last year.
John Roberts, Analyst
And then, on PCG, I think you highlighted the energy customers with the lower energy prices I thought those customers probably had pulled back.
Frank Sullivan, Chairman and CEO
We're still seeing solid growth in the energy markets whether it's gas and fracking. Interestingly enough, there has been a resurgence in some offshore production. And so, while there's been some volatility in oil prices per se with slowdowns in China persisting longer than people thought, I think the geopolitical issues and where the energy companies are suggest to us at least for the next year that that will continue to be a relatively solid area for business.
John Roberts, Analyst
Thank you.
Operator, Operator
And our next question will come from Frank Mitsch with Fermium Research. Please go ahead.
Frank Mitsch, Analyst
Hey, Frank.
Frank Sullivan, Chairman and CEO
Hey, Frank. Hey good morning.
Frank Mitsch, Analyst
Good morning, Frank. Hey, Rusty. Last conference call you said that your best days were ahead in terms of cash flow. And obviously this quarter delivered on that. And obviously the inventory question has been discussed at nauseam, but the net debt has come down as well. So it pegs the question you bought back $12.5 million the last couple of quarters. How are you thinking about use of cash buybacks versus M&A in the current environment?
Rusty Gordon, Vice President and Chief Financial Officer
Yeah in terms of share repurchase, it has been modest with all the economic uncertainties over the last couple of years and with COVID of course before that. The biggest potential use will be if we run into bigger acquisitions. We've been doing smaller acquisitions over the last couple of years with multiples being out of whack. As you know we're very disciplined in the prices we pay. And as a result of the inflated expectations, those acquisitions have come in light. But you are correct. If acquisitions stay relatively small, we will have the ability to enlarge from the minimal level of share repurchase.
Frank Sullivan, Chairman and CEO
Sure. We expect to conduct around $50 million in share repurchases next year and will approach this opportunistically based on market conditions. Our priority will be debt reduction through smaller transactions. The M&A market, both for large and small deals, has significantly declined. Part of this is due to sellers' expectations for valuations that were more favorable a year or two ago. There has been a disciplined approach on the buy side, especially for substantial global deals and smaller to midsized transactions. At some point, we anticipate the market will adjust in response to the current interest rate environment and the increased cost of capital. Some M&A valuations have been lacking discipline, largely influenced by private equity, where the incremental cost of capital was nearly zero, which is no longer the case. We will make use of free cash flow to pay down debt and modestly repurchase stock. I believe that when our Board meets in October, we will likely raise our dividend for the 50th consecutive year, which would be a significant milestone, and prepare our balance sheet to seize opportunities that arise at the right price.
Frank Mitsch, Analyst
Got you. Very helpful. And Frank you indicated that Europe, ex FX was actually up a little bit in the fourth quarter, here we are seven weeks or so into the first quarter. What are you seeing in Europe? What are your expectations for that region?
Frank Sullivan, Chairman and CEO
It's a great question, and I appreciate your inquiry. Europe has impacted our sales and earnings negatively for five or six quarters. However, we've noticed an improvement at the end of Q4, which is continuing. Although the improvement is modest, it is a step in the right direction. We're seeing sales increase and margins expand. We're also focusing on Europe by having one of our senior executives relocate there to accelerate some of the MAP programs that have lagged compared to our initiatives in North America. The underlying trend is positive revenue growth and some margin expansion in Europe, a change we're pleased to see after several challenging quarters. There are several signs of growth emerging. However, I must note that none of us have faced a period of such volatility as we have in the last two or three years. Typically, I would feel optimistic about a three-month trend, but given the fluctuations we've experienced recently, I believe we'll feel confident about a trend when it shows consistency for five or six months.
Frank Mitsch, Analyst
Got you. Thanks so much.
Operator, Operator
And our next question will come from Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.
Aleksey Yefremov, Analyst
Thanks. Good morning, everyone. Hey Frank, I think you historically talked about infrastructure uplift mostly in calendar 2024, but I think you mentioned some more of the wins just on this call. Are you seeing acceleration in this end market in the US in particular?
Frank Sullivan, Chairman and CEO
We are seeing benefits from onshoring. We've long been a provider of fireproofing coatings and specialty flooring into the tech sector and there's significant investments there. We're seeing onshoring in other areas. And so that is benefiting us. You're seeing highway marine different areas where you're seeing pretty good investment. And so we participate in all those markets. And I'm a little bit hesitant, because the amount of money in a $1.2 trillion infrastructure build, it's hard to track where all that is. And over what period of time it's going to flow through, but it's certainly a positive tailwind for our Performance Coatings Group and portions of our Construction Products Group.
Aleksey Yefremov, Analyst
Thanks, Frank. And then another question on pricing. How is competitive environment, especially in the areas where you have to bid on projects has it been disciplined so far?
Frank Sullivan, Chairman and CEO
Sure. Historically, we've been able to hold on to most of our price in most of our businesses. The categories where that has not been true have been more commodity pass-throughs. So, in some areas of silicones, we had a lot of value in the more commodity space of silicones, we package it and sell it through, and silicone prices rose dramatically. We thought to kind of catch up on price, that's true in our Construction Products Group and in the silicone portion of our DAP business. And as silicone prices have dropped, our prices have moderated as well. Probably the only other area where I would tell you historically, we've seen prices go up and down is in the highway portion of infrastructure pretty highly competitive there. And so you'll see prices go up and go down based on the underlying core raw materials to some of those systems. But other than that historically, we've been able to hold on price, and that's what we're doing at this point. As I said we've got some lost margin to pick up, and I would expect that to continue for the foreseeable future.
Aleksey Yefremov, Analyst
Thanks, Frank.
Operator, Operator
And our next question will come from Kevin McCarthy with Vertical Research Partners. Please go ahead.
Kevin McCarthy, Analyst
Good morning, Kevin.
Frank Sullivan, Chairman and CEO
Good. Thank you.
Kevin McCarthy, Analyst
To come back to the subject of cash generation. It sounds like you have some ongoing benefit from reduction of inventory. So can you comment on the working capital that you might be able to extract in fiscal 2024 as well as your capital expenditure budget for the year?
Rusty Gordon, Vice President and Chief Financial Officer
The CapEx budget for the year will be in line with where we were in fiscal 2023.
Frank Sullivan, Chairman and CEO
The $250 million or so. Yes. And then on working capital, I think I'd rather report our achievements in hindsight other than the comment I made earlier, which is we have a goal of improving our working capital as a percent of sales by 300 or 400 basis points over the next three to four years. And so if you just do the simple math call it, 100 basis points a year maybe we can do a little bit better than that. But if you apply that 300 or 400 basis points as a percent of sales, you can get a pretty good sense of the additional cash flow that we should be able to generate on top of what we would generate based on revenue growth and our profit margin profitability. And it's a function of us getting better more efficient and our team is doing a really good job on the MAP 2025 initiatives, and the fact that we are an underperformer in this area. So, versus our peers there are efficiencies that we are gaining that we have not had in the past. That's our challenge and it's something we're up for today relative to the disciplines we have and the approach we have now with MS-168 and a more center-led approach to our operations than what we had at RPM five years ago.
Kevin McCarthy, Analyst
That's very helpful. I appreciate the comments.
Frank Sullivan, Chairman and CEO
Thanks, Kevin.
Operator, Operator
Our next question will come from Arun Viswanathan with RBC Capital Markets. Please go ahead.
Arun Viswanathan, Analyst
Good morning. Thanks for taking my question. Congrats on the strong results and the favorable outlook here. So in listening to your comments, it sounds like there were a couple of positive drivers maybe slightly better infrastructure and reshoring activity, some price holding price cost a little bit better as well. And then your own MAP gains as well. Is that accurate maybe as the top 3? And then if you were to kind of see, how that moves forward are there further improvements in each of those categories that you expect or is it maybe a recovery in commercial and some other weak parts that would be bigger drivers? Thanks.
Frank Sullivan, Chairman and CEO
Sure. So I think you got that right. I would add that some of the more solid or stable business activity we're seeing is a result of this bullwhip inventory effect and supply chain challenges that we saw more broadly across our businesses than we've ever seen before. And so, excess inventories or having the wrong inventory in the wrong places because people overbought during a period of time where they couldn't get stuff that's been corrected. And it's been corrected perfectly? No. And is there's still adjustments here and there both at RPM and with our supply chain that will occur? Yes. But the biggest chunk of that has been corrected. So now there is a normalized demand that's serving we think an improving market in the construction area, an improving consumer takeaway although it's still modestly negative as we sit here today. And so those are the dynamics. I think that's right. So going forward improvement in the underlying dynamics. And then lastly assuming that we avoid recession substantially easier comps for the RPM businesses and substantially better leverage capabilities if we have positive unit volume in the second half of the year. If we have a positive unit volume in the second half of the year versus what we experience this year and the internal challenges that we undertook to drive cash flow you'll see nice margin expansion. So those are the dynamics to think about for the year.
Arun Viswanathan, Analyst
Great. And then sorry if you already addressed this. But on the MAP gains, did you provide an actual dollar number that will maybe flow through in fiscal '24 out of that $160 million? And if it's less than say $120 million or something and then would it be the remaining $40 million in fiscal '25 or how should we think about what actually flows to the P&L?
Frank Sullivan, Chairman and CEO
The original guidance we shared during the Investor Day a little over a year ago was $160 million for fiscal '24. Some of that is contingent, meaning we will realize it over the course of the year on a sustainable basis. We will report on this quarterly as the year progresses. However, I expect to see over $100 million reflected in our profit and loss statement in fiscal '24. If we meet our targets, we aim for a run rate of $160 million by the end of the year. That is the plan. Given our current momentum, I anticipate at least $100 million will be reflected in the profit and loss during the year.
Arun Viswanathan, Analyst
Great. Thank you.
Frank Sullivan, Chairman and CEO
Thank you.
Operator, Operator
And this concludes our question-and-answer session. I'd like to turn the conference back over to Frank Sullivan for any closing remarks.
Frank Sullivan, Chairman and CEO
Thank you, Joe and thank you to everybody for your participation on our call today. We're excited about improving business dynamics throughout RPM in combination with the effective execution of our MAP 2025 program. We look forward to updating you on our first quarter results and talking about our dividend activity and our outlook for the balance of the year, when we're together again in October. Enjoy the rest of your summer and have a great day.
Operator, Operator
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.