RPM International Inc. Aktie

Good day, and welcome to the RPM International Fiscal Third Quarter Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President, Investor Relations and Sustainability. Please go ahead.

Thank you, Rocco, and welcome to RPM International's conference call for the fiscal 2026 Third Quarter. Today's call is being recorded. Joining on today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. 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 after the third quarter of fiscal 2025 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. As a reminder, certain businesses that were previously part of the Specialty Products Group have been reallocated to other segments effective June 1, 2025.

As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. This change has no impact on consolidated. Now I will turn the call over to Frank.

Thank you, Matt. Thank you all for joining our investor call this morning. I'll begin with an overview of our third quarter results, provide an update on how current events in the Middle East are impacting our business followed by Michael Laroche, who will cover our financials in more detail. Matt Schlarb will then provide an update on cash flow, the balance sheet and how our focus on maintenance restoration and energy efficiencies has helped us during these volatile economic times. .

And then finally, Rusty Gordon will conclude our prepared remarks with our outlook, after which we'll be happy to answer your questions. Beginning on Slide 3. We generated record results in the third quarter with top line growth, including higher unit volumes translating into strong earnings growth and improved margins in all segments. The RPM associates are executing at a high level on the things that we can control.

The economic backdrop remains volatile during the third quarter with some of our geographies experiencing severe winter weather. We successfully navigated these challenges by focusing on our competitive strengths, including turnkey and system solutions for high-performance buildings, a focus on maintenance, restoration and repair and a nimble sales approach to targeted expanding end markets.

Aided by the operational improvement initiatives we put in place, we were able to leverage this growth to achieve a nearly 50% increase in adjusted EBIT. With this quarter, we have delivered record adjusted EBIT results in 15 of the last 17 quarters. Turning to Slide 4. We provide -- we previously talked about the power of RPM, combining RPM's ability to outgrow our markets and improve operational efficiency. This was on full display in our third quarter.

We saw positive results from the targeted growth investments we've previously shared and the profitability of this growth was amplified by the operational improvements we have and continue to put in place. These include actions like our Green Belt program, which is now trained over 600 RPM associates and has expanded to administrative functions.

Green Belts have generated more than $50 million in savings with $30 million in our current pipeline. We have also started realizing benefits from the SG&A-focused optimization actions we announced last quarter. These actions generated approximately $5 million in savings during the third quarter.

The optimization actions underway Go Beyond expense reduction. They're designed to make our organization more agile better positioned to serve customers and to achieve accelerated growth. All segments have begun this transformation with some of the most meaningful changes occurring in our consumer segment.

As announced in our press release this morning, we promoted [ Don Harmeier ] to President of the Consumer Group. Under his leadership, the consumer group is reallocating assets towards its highest growth opportunities while maintaining strong financial discipline.

Our center-led procurement team continues to do excellent work leveraging our company-wide buying power to achieve savings. They have played a critical role in navigating new supply chain challenges caused by current geopolitical activities.

Turning to Slide 5. I'd like to address the conflict in the Middle East, its impact on our business and how we are responding. Recent geopolitical events have created supply chain disruptions and increased raw material costs, which, as a reminder, represent approximately 60% of RPM's cost of goods sold.

While the conflict is having a global impact on costs, the effects are being felt most acutely in the Middle East, Africa and the Asia Pacific regions, which together account for approximately 4% of RPM's year-to-date revenues. In Europe and South America, which represents about 20% of sales, inflation has picked up meaningfully.

North America at 70% of RPM sales has also experienced inflation but to a lesser extent, and remains the region most insulated from the direct effects of the current conflict. Having navigated significant supply chain disruption and inflation in recent years, our teams are prepared for the current environment.

We have contracts in place covering the vast majority of our raw material volume requirements. These contracts help ensure continuity of supply during periods of disruption and reduced volatility from underlying commodity price movements.

In addition, our use of FIFO accounting delays the P&L impact of cost changes, providing us additional time to respond. Previous actions such as qualifying multiple suppliers for key raw materials and developing strategic long-term supplier relationships have further positioned RPM to manage through the current challenges.

As a result of these efforts and the execution of our center-led procurement team, supply conditions generally remain good for us globally, with only limited disruptions, primarily in the Middle East. We currently expect raw material inflation of approximately 1% to 2% in the fourth quarter of fiscal '26, increasing to an estimated mid- to high single-digit range in the first quarter of fiscal '27.

While the situation remains dynamic, we are taking appropriate actions to mitigate cost pressures and consistent with prior inflationary cycles and begun implementing price increases offset inflation that we are unable to mitigate. These price increases vary by business and by region with those experiencing the most inflation also having the largest price increases.

Finally, I want to commend our procurement team for their strong execution, both in the current environment and through the vital tariff conditions we've experienced over the past year. I also want to thank our teams around the world who continue to focus on serving our customers during these challenging times and particularly our associates in the Middle East, where safety is our top priority. They have continued to operate despite the many challenges facing that region today.

I'll now turn the call over to Michael Laroche to cover our financials for the quarter in more detail.

Thank you, Frank. On Slide 6, consolidated sales increased nearly 9% to a record driven by engineered solutions for high-performance buildings, M&A and FX, partially offset by continued DIY softness. Adjusted EBIT increased to a record as sales growth, including higher volumes resulted in improved fixed cost utilization.

SG&A-focused optimization actions also contributed to the profitability growth and were partially offset by higher health care costs. Adjusted EPS was a record driven by higher adjusted EBIT. Adjusted EBIT and adjusted EPS exclude MAP-related costs including $22.1 million in pretax charges associated with SG&A-focused optimization actions implemented during the quarter.

Geographic results are on Slide 7. All regions grew sales in most markets outside the U.S. benefited from favorable FX rates. Europe grew over 20%, driven by M&A and FX. North America grew 6.3%, driven by an increase in high-performance building solutions and was also aided by M&A. In emerging markets, growth was led by Africa and Middle East as they continue to have success serving high-performance building and infrastructure projects.

Moving to our segments on Slide 8. Construction Products Group sales grew to a record with broad-based strength in North American businesses, including roofing solutions, wall systems and concrete admixtures, currency translation and a rebound from the government shutdown also contributed to the sales growth.

Improved sales mix, SG&A-focused optimization actions and fixed cost leverage drove adjusted EBIT growth. which more than offset temporary inefficiencies from plant consolidations. Next, on Slide 9, Performance Coatings Group achieved record sales with broad-based growth across its businesses. Protective Coatings and passive fire protection performed particularly well, as did infrastructure and high-performance building solutions in emerging markets.

Adjusted EBIT was a record driven by higher sales, SG&A-focused optimization actions and improved fixed cost leverage. Moving to Consumer Group, whose results are on Slide 10, and M&A and pricing to recover inflation generated record sales, partially offset by continued soft DIY demand and product rationalization.

Adjusted EBIT grew as a operational improvements, including SG&A-focused optimization more than offset reduced fixed cost leverage from lower volumes and temporary inefficiencies from facility closures and transitions. M&A integration also added to adjusted EBIT growth.

Now I'll turn the call over to [ Matt ] to cover the balance sheet, cash flow and our focus on restoration.

Moving to Slide 11. Cash flow from operations, which has been a focus of MAP, remained solid during the third quarter. Year-to-date, we have generated $656.7 million, the second highest amount in the company's history. This has allowed us to continue returning cash to shareholders through dividend and share repurchases, which totaled $255.3 million through the first 9 months of the year, an increase of 5.2% from the prior year. .

Liquidity remained strong at $1.02 billion, which provides financial flexibility to take advantage of M&A opportunities where the pipeline remains good. On that topic, we closed on the previously announced agreement to purchase Kalzip on March 31. This acquisition will expand CPG system offerings to include high-performance metal roofing and facade options that meet demanding specifications. [indiscernible] generated calendar 2024 sales of approximately EUR 75 million. And once fully integrated, we expect this company to be accretive to margins.

Proactively, we acted early and extended the maturity of our revolving credit facility to February 2031 and maintains its size at $1.35 billion. This will help maintain our financial flexibility. Turning to Slide 12. We wanted to provide additional details on our maintenance repair and restoration focus, which generates approximately 2/3 of our sales. Whether it's a consumer preparing their grill for another season, a municipality restoring its critical infrastructure or a building owner improving the performance and aesthetics of their asset. Our value proposition is the same.

Our products and services allow end users to extend the life of their assets and improve their performance, often at a fraction of the cost of replacement with far fewer disruptions. Additionally, this focus is a core component of our Building a Better World sustainability program by reducing waste, improving efficiency and extending the life of assets.

During times of economic volatility, our ability to provide maintenance and restoration solutions to address our end users challenges has distinguished us and proven to be a key component of our ability to outgrow our underlying markets.

Additionally, we offer solutions that make both new and existing structures more energy efficient and increasingly important and valuable capability in a period of rising utility costs. The images on Slide 13, highlighted school constructed using both our Nudura insulated concrete forms along with the Dryvit exterior insulation and finished system. These offerings enhance thermal and insulation and improve the building's resistance to extreme weather events. The result is an attractive high-performance facility that lowers operating costs for the owner while delivering meaningful environmental benefits. Now I'd like to turn the call over to Rusty to cover the outlook.

Our outlook for the fourth quarter can be found on Slide 14. And Economic conditions are expected to remain volatile, driven by events in the Middle East. Additionally, prior year comparisons will be more challenging. Despite these headwinds, we are reaffirming our sales guidance and expect to generate mid-single-digit revenue growth aided by M&A. .

Organic growth is expected to be strongest at our construction businesses as they focus on maintenance and restoration solutions for high-performance buildings. In consumer, M&A growth is expected to be partially offset by soft DIY markets. As Frank mentioned, we currently anticipate fourth quarter raw material inflation will be in the 1% to 2% range, with mid- to high single-digit inflation expected in the first quarter of 2027.

We expect to offset raw material inflation with pricing. In the fourth quarter, we will also see more benefit from the SG&A-focused optimization actions we announced in January. We anticipate that these actions will have a favorable P&L impact of around $20 million in the fourth quarter, partially offset by inflation in areas we've discussed for the past several quarters like wage inflation and more recently, freight inflation.

Taking all of this into account, we are reaffirming our adjusted EBIT guidance of low to high single-digit percentage growth over record prior year results. The wider-than-normal adjusted EBIT range reflects the heightened uncertainty in our markets. This concludes our prepared remarks, and we are now happy to answer your questions.

[Operator Instructions] Today's first question comes from John Roberts at Mizuho. Okay. I believe we'll move on to our next partner here. Our next party comes from Matthew DeYoe from Bank of America.

So the raw material inflation numbers, I think not surprising, I guess. I wanted to ask, just given the backdrop and how fluid it is. What kind of takes you to the low end versus the high end for fickle 1Q? How do the how do you get to the high end? What do you think you need to see market-wise to take you there? What are the assumptions that bring you there?

So I'll answer that question, which is obviously key for our whole industry kind of at a high-level perspective first. And then give you a little specifics. But from a high-level perspective, we seem to have a whole of government that doesn't like stability, whether it's tariffs or government shutdowns and now war.

And so that volatility I think, frustrating a lot of folks were facing as is the whole industry, a meaningful raw material price increase potential. We're seeing significant increases across a lot of base chemicals as we speak. Their impact should be modest in Q4, but we'd anticipate them, as Rusty commented to be material in the first quarter.

Back to the volatility, the markets are reacting well today to geopolitical events. If there is some period of stability, I think we're highly confident in the RPM ability to deliver strong results based on growth. You can see that in our third quarter, both at the operating gross profit margin line and the SG&A expense reduction program, which is continuing, are optimized to leverage our volume growth to the bottom line pretty well.

So specific to Q1, I think, as Rusty commented, it's going to be hugely variable. There's a scenario in which we would have modest mid-single-digit raw material word. There is a scenario in which we will have high single-digit inflation.

And so TBD, depending on volatility in the Middle East, the one thing that we're very confident in as we look out over the next 6 months is stability and supply. We've got really good relationships with key raw material suppliers, except for the Middle East, which we are seeing some disruptions in supply, we don't see supply challenges at this point.

If the situation in the Middle East spins out of control, obviously, all bets are off, both in terms of understanding where raw material costs are going and what raw material availability might look like in the fall.

All right. I appreciate that. And then on the SG&A front, a lot of puts and takes on the quarter itself. And I know you have some deals coming in, you have some costs coming out. If we were to strip out some of the noise, what would you consider like an applicable go-forward SG&A number here? How many -- how much net savings were harvested in this quarter, noting I think you said $20 million next quarter?

In the third quarter, it was about $5 million. When you strip out the impact of FX and acquisitions, our SG&A was relatively flat year-over-year in dollar terms. .

So there's really good action going on there. We would expect the positive impact to be about $20 million, as Rusty indicated, that might net out to something less in the mid- to upper teens, depending on the impact of inflation in nonraw material categories like freight and then $75 million is lined up for fiscal '27 spread relatively evenly across our quarters.

And our next question today comes from John McNulty of BMO Capital Markets.

Yes. with regard to your ability to put through price, I guess, around some of the raw material inflation I guess can you give us an update as to whether that process has really started at this point?

And how long you think it takes to catch up to where the raw materials are going? Do you think given the FIFO benefit or cushion that you have that we don't see any lag in the price versus cost? I guess how would you articulate it?

Sure, John. This is Matt. I'll take that one. So it's ongoing now. Some -- and it really varies by business. It varies by geography because the levels of inflation are different in all these areas. -- and it has begun.

And maybe it's probably helpful to look at how this is progressing in our view on it. So in the third quarter, pricing was up a little over 1%. And price/cost was favorable because we were catching up with some prior inflation. In the fourth quarter, because we're implementing some price increases now pricing will be higher again, and we still expect price/cost to be favorable.

And then as we look at the first quarter when we're starting to see that inflation, we are implementing those price increases. But as you can imagine, it's pretty dynamic. Things are changing on a week-to-week, if not day-to-day basis in some of these areas. So those incremental price increases are going on now.

And so we should have better visibility on what that ultimately is in the next few months. But we are confident that pricing in the first quarter will be higher than the fourth quarter.

Got it. Okay. No, that's helpful. And then when you think about the construction and the performance segments, both did really solidly from a volume and top line perspective. I guess there was a lot of noise.

You had some of the government shutdown issues from the prior quarter, and you were seeing some benefit of that early on. But it also sounds like you've had a lot in the backlog, and it looks like it's starting to make its way through.

I guess, what were the bigger drivers of the 3Q volume growth? And I guess, how do you expect that to kind of play out as we're going forward in both 4Q and at least at the start of 2027.

Sure. So in our Performance Coatings Group, we have solid backlogs and they seem to be being maintained. We are seeing a shift from larger projects to more small, medium-sized projects. That's good for margins, but create some volatility in our Construction Products Group, our backlogs continue to grow, both in roofing in the waterproofing and building envelope areas. As we've indicated in the last couple of quarters, the work in Pure Air for the HVAC restoration business is also growing very nicely and really gaining some traction now.

We're excited about the Caleb acquisition. They are a leader and a German-based leader in the U.S. and in some cases globally for aluminum and metal roofing applications. Some are your core traditional industrial and commercial roofing, some are real high-profile architectural projects.

Most of their work is European based, and so we will be working in the next 6 to 9 months to bring the [ Calcite ] products into the U.S., which is a real bang for us once we get it done effectively. So we're not only building good backlog in our core business, but particularly in our Construction Products Group, a lot of these product lines are very leverageable to drive future organic growth.

The flip side is in consumer, still really punky in terms of takeaway we've adjusted accordingly in terms of our expense base and really allocated growth investments to the areas that are both highest margin, and I think you have the best potential for growth as the DIY markets start to stabilize, which before all of the Middle East activity, we were starting to see after what's been more than 2 years of really punky consumer DIY takeaway.

Our next question today comes from Mike Harrison at Seaport Research Partners.

Congrats on the nice quarter. I was hoping that you could talk a little bit about the temporary inefficiencies that you've seen related to the plant consolidations. How much of a headwind, if you can quantify it, did you see in the third quarter? And have those inefficiencies largely run their course? Or are there still some more to come? And I guess, which segments should we expect to still see some impact in Q4 and into next year?

Yes, Mike, it's Rusty here. In terms of the third quarter, so a little more than $6 million that cost us in some of these facility consolidations, about 2/3 is in consumer. They have a lot going on in Europe between opening a new shared RPM distribution facility and also consolidating 2 plants into 1 and rationalizing some lower-margin products there. .

Probably the remaining 1/3 mostly at our construction products group, they are consolidating their plant network in North America. And they're also repurposing a facility in Europe to sell Nudura, which is exciting. So I would expect that both of those will be completed by this fall. And so you will not see that negative impact at the end of the second quarter and fiscal '27 or beyond.

All right. And then just investors are starting to turn their attention to next fiscal year. I know there's a lot of moving pieces right now, but maybe could you walk through some of the puts and takes as we start to think about what earnings growth could look like next year?

I'm just curious if you have any current expectations for volume growth, what price versus cost could look like in terms of being a headwind or a tailwind? And then I believe you mentioned the MAP savings contribution something on the order of $75 million. But any initial thoughts on next year's earnings growth?

Sure. I'll start at a high level. Our 3 development is pretty far along. We would expect to have that completed this summer and presented to our board in July and then be in a position sometime this fall to provide some of the details of what we are currently calling [indiscernible] publicly. It will be a new long-term strategic plan out to 2030. I think you're seeing the beginnings of what that might look like our operating improvement initiatives are continuing, and you'll see some more detail on that in the fall.

The SG&A actions that we took in January are a down payment on that and so while we've committed to $75 million for fiscal '27. We'll provide more detail on what SG&A allocation looks like, both in '27 and beyond. And I think there'll be significant margin improvement opportunities there as well.

Lastly, we still have opportunities of a couple more percentage points we feel in improving working capital and therefore, enhancing our cash flow. With that backdrop, we're going to use fiscal '26, the May 31 year-end is kind of the base year out to forecast. And it really goes back to whether or not the hostilities in the Middle East and the are ran is drawn to a close here in the coming weeks or months. or whether we are in a more protracted global problem.

And I say that, I think there is reason to believe that this inflation spike could be temporary, and that would be very helpful. And then you'll see a continuation of what we just generated in the third quarter in terms of positive volume growth and good leverage to the bottom line.

If it is not, then I think the world could be facing another bid and administration like spike inflation that's sustained as it spreads across energy, freight, and materials on a higher-level basis, that's certainly not what anybody hopes for. And I think we'll be in a far better position to understand where the world is heading when we release fourth quarter results in July versus all the volatility from day to day and week to week that we're facing today.

And our next question today comes from Ghansham Panjabi with Baird.

Good morning, everybody Frank, Frank, just on following up on the previous questions. How do you think this inflation cycle will be different from the previous ones? I mean, each of them seems to have different dynamics that are unique to them. And I'm just asking because this one is very supply shock related versus being demand-led.

And so do you think that the reversal will be just as pronounced if, in fact, oil has peaked and has started to come down. And then related to that, do you expect inflation to sort of sequentially flatten out after what you see in fiscal year 1Q? Or do you anticipate sequential increases beyond that due to lags just based on what we've seen so far.

Sure. So again, the third quarter and our expectations before this massive disruption in the Middle East after rounding 2 very difficult years in the consumer DIY market, and generally, consumer products in general, as you've seen from a lot of CP companies and folks in the DIY and building materials space. We were anticipating stability and some modest growth there.

I'm not sure we're going to see that now with some of these disruptions and the impact on price increases, which consumers have been sensitive to across consumer products. So we're very aware that -- this is not, as you commented on, Gansham, this is not demand related. I think our Performance Coatings and Construction Products groups are outperforming their broader markets and so we're picking up share new products and new categories for maintenance to repair are starting to grow for us.

But broadly speaking, commercial construction is still not recovering outside of data centers, you're seeing some moderation in industrial capital spending so I think that if the hospitalities in the Middle East are drawn to a close in a more stable basis, you could see a reversion to oil prices and the related impact on raw materials pretty quickly. As we noted in the third quarter, inflation is almost nonexistent.

Price cost inflation for us on a material basis in the quarter was slightly less than 1%. And our price across all of our PM businesses was slightly more than 1%. We did not anticipate much in the way of further price increases, raw material cost increases in Q4 until obviously the last couple of weeks.

So I think we could get back there very quickly. I also think lastly, the cessation and this is Frank Sullivan on geopolitics, so take it for what it's worth. But I think a stabilization in the Middle East that people believe is lasting could actually be a catalyst for a pickup in economic demand, which would be great for everybody, and obviously, great for RPM given the structural improvements we're making.

Okay. Perfect. And then just for my second question, as it relates to the leadership changes in the consumer segment, can you just give us some high-level thoughts on what we should expect in terms of changes as it relates to the commercial side for that segment?

Sure. So again, I'll start with a very high-level perspective. We've had a frustrating couple of years, not unique to us. I think in some aspects, we've outperformed the broader paint category, which has been under pressure because of interest rates and housing turnover and other factors.

But we operate here with a few simple principles, 1 of which is if you want a different outcome, you got to do something differently. And we had not been approaching that market differently over the last couple of years.

And like everybody, we're experiencing some frustrating results so we made a change at the leadership level. We made a significant readjustment of both our expense levels and where we allocate our SG&A dollars towards growth. Of the $100 million in total SG&A program that we communicated in January actually about $15 million of that is in cost of goods sold, about $80 million to $85 million is in SG&A. Just about half of that, including a lot of the cost of goods sold elements are in our consumer group.

And our next question today comes from Patrick Cunningham at Citi.

Could you maybe help unpack the relative strength within the Performance Coatings Group. It seems like pretty positive on protective and fire protection. But curious how other markets are performing, particularly the recently added Industrial Coatings group.

We're taking share. We're picking up some pieces and parts of some larger OEM accounts that we've traditionally not targeted in the Industrial Coatings group. So that's positive. We are reorganizing some of their activities in Europe, while modest, they've not been as profitable as our U.S. business. So that's improving the bottom line for the Industrial Coatings piece. .

And I think there's a nice fit there long term as our Carboline business is certainly a broad project and daily maintenance repair between the Powder Coatings activities and product production of the Industrial Coatings group and the capabilities to leverage that across the Carboline distribution and sales force.

So there's some synergies there as well. We're seeing strength for us in maintenance coatings, industrial coatings and in particular, fireproofing, which is a broad area globally of strength for our Carboline business. And our Stonhard business continues to generate really good results, both for Stonhard and our Tremco Roofing business, we feel that our supply and apply model, which is pretty unique in both categories is giving us an advantage in what's been a challenging labor construction labor market environment.

Our fiber grade business, they're based in Texas, doing quite well in terms of both component of construction, but in data centers and energy and other areas where they're FRP grading and FRP structures and actually ability to design different platforms and structures for industrial markets is actually growing quite nicely.

Great. And I think emerging markets, while it's relatively small, has been a pretty substantial portion of growth the past couple of years. I guess, first, have you seen anything in terms of order cancellation, project pauses or general demand disruption in the Middle East or perhaps Asia? And how should we think about potential risk to top line if the conflict persists?

Yes. I appreciate the question. We took a different approach to the developing world a couple of years ago, what we call the RPM platform approach. We have a great leadership team in our South African-based and they have oversight of Middle East, Africa, India, Southeast Asia.

And you can see that in the last year or so in most recent quarters, including the third quarter, solid organic growth improving profitability, really a well-run group, and it gives us confidence as RPM that we now have a more strategic approach to developing and the developing world to growing in the developing world. So we're very excited about that, and you can see it in our results.

To your specific question, we've seen an immediate impact in the Middle East. Our March was quite good in the Middle East, but we don't feel that, that's going to continue in Q4 because we've led through a lot of inventory. And so it's the one area where raw material supply is impacted and we will feel that certainly Q4 and beyond.

You're starting to see a little bit of an impact both in higher inflation and concerns about availability in parts of Asia. And all of those regions, particularly Asia, Middle East, our platform approach is more impacted by the shutdown of the straits and raw material production in the Middle East, which has been impacted. Beyond that, other than inflationary pressures, we don't anticipate any raw material supply issues.

And our next question today comes from Kevin McCarthy with Vertical Research Partners.

Frank. A broad question for you. How would you compare and contrast your efforts to optimize the price cost relationship in today's inflationary environment relative to what you experienced 4 years ago in the wake of Russia, Ukraine.

Maybe you can remind us what worked well back then that you're continuing and maybe any learnings and things you're doing differently moving forward?

Sure. We, like most companies are far better positioned today to manage through a crisis because of all that. In part because of a very successful centralized procurement activity that started in 2018 because of our ability to really engage our teams be strategic with major suppliers in ways that we weren't 7 or 8 years ago.

So we've developed some longer-term relationships, more contract driven. And so I think we're in a much better position today than we were at the beginning of the bid administration inflation period. We're more sophisticated. We get weekly reports on the impact of tariffs on a by region, by country, by category reports. We have, as Matt indicated, pretty sophisticated understanding of how inflation is hitting us by country, by region and by category.

And so we're a lot more data driven on a real-time basis than we were -- the last thing I'll say is we're also more sensitive to consumer price elasticity. You're seeing that again in various consumer product areas. And so we're sensitive to that relative to our consumer DIY products. All of that will result in a mix of price increases where appropriate and where necessary by product line or by region perhaps some adjustments in supply or manufacturing, greater efficiencies, some product engineering in terms of taking costs out and all of that are ways and/or expertise at RPM that didn't exist 7 years ago.

Very helpful. And then secondly for Rusty perhaps, could you provide your updated thoughts on maybe 2 cash flow items, working capital outlook given what we've talked about inflation wise? And then any early thoughts on capital expenditure trajectory in 2027?

Yes. In terms of capital expenditures, we've had a lot of plant consolidations and ERP go live. In terms of CapEx, this year, we're probably trending Kevin, towards million, $235 million in that range. So not quite as high as you've seen in past years. In terms of working capital year-to-date, we've made a little progress. Our cash conversion cycle is down by a day, and that's in spite of a lot of challenges with inventory between managing with tariffs and recent other turmoil managing inventory has been a challenge. We have backslid just a little bit, but we've more than offset that with continued progress and managing our terms with our suppliers, with our strength and procurement team.

Our next question today comes from Arun Viswanathan with RBC.

This is Brian Don on for Arun. Can you talk a little bit more about the rising health care expenses. Specifically, could you quantify what was the Q3 impact and you expect it to continue on to Q4 and fiscal year 2027.

So in Q3, health care costs were up another $4 million. As we've commented before, the rising health care costs are not unique to us. It's been a huge cry across the United States. Relative to what's happening in health care costs and insurance costs. We did make a decision more than a year ago to add some of these weight loss drugs to our health care program. That's been part of the significant rise this year that will annualize this summer.

We believe long term and will actually have a positive effect on our health care costs. But over the last year, it's certainly been part of the increase. So we would anticipate that our health care costs stabilize somewhat in fiscal '27. But I don't see anything reversing.

And our next question today comes from David Begleiter with Deutsche Bank.

Construction Products exceeded Street expectations. Anything you can point to that drove that large beat there in that segment?

Sure. We have a really good team that's executing at a really high level. And they are very focused on providing solutions, turnkey solutions. And so we have very -- made a very deliberate shift from 10 years ago selling components for distribution, particularly in the CS&W the Trunk Sealant business, which is indicated in past calls. 10 years ago, we were about 60% distribution and 40% direct on major projects that has reversed about 60% direct. When we get a building envelope sale, we're getting perhaps in one project to Nudura walls, the Dryvit finished systems and all of the Tremco gaskets and sealants and waterproofing coatings that go with that.

And so we're able to sell complete systems. We're able to warrant complete systems and we're doing a better job of understanding what segments of the market value that and focusing our time and effort there. And then we're adding new categories. So we've done a lot of small acquisitions and from time to time, analysts scratched their head and asked us whether these small acquisitions are worth their time given our size.

I can tell you on our Construction Products Group, the answer is definitive yes. We've added some high-performing kind of unique expansion joint products from metal expansion joints to different polymer expansion joints to add to what we have.

Most recently, we bought 2 relatively small expansion joint businesses in Europe. We're transferring their technology and distribution to the U.S. And then most recently is the Kalzip acquisition, again, $75 million, mostly Europe-based with some real high-profile projects like to sphere like some of the big airports but not really present in the United States. And we're already selling purchased for resale of $40 million worth of metal roofing in the U.S. And so we're excited about what that can do.

So a combination of being in the right place, system selling and then having a real strategic approach to acquisitions or product lines that we can expand across our distribution is what's building a really solid momentum in our construction products group, and we see that continuing.

Very helpful. And Frank, given that large be led by construction products, why can you at least raise the low end of the Q4 guidance range for EBIT .

It's really about geopolitical circumstances. I can sit here and say confidently that we're not going to see any supply disruptions. Given what we know today and what we believe going forward, I in the world are hoping and praying for good outcomes.

There's a possibility that, that doesn't happen. And if things get worse in the Middle East, that could clearly impact our results in the next couple of months. Secondly, we're already seeing the impacts of that. We're anticipating the impacts of that in April and May, almost like in the fall, we had a really strong Q3.

We had a very solid March but there are a lot of cautionary flags as a result to what could happen in April and May. So I think we're being appropriately cautionary in a wider than normal guidance.

And our next question today comes from Mike Sison with Wells Fargo.

Frank, just curious when you think about 26, if you were able to hit the range for the fourth quarter, your adjusted EBIT will be up low to mid-single digits, similar to fiscal '25. So given you've done a great job with cost savings and the MAP program and rolling out another. Do you think your EBIT growth should get better?

I mean I understand that DIY has been tough and everything. But do you think -- should RPM be doing stronger EBIT growth for the rest of the decade? And how do you think you sort of get to that higher ramp going forward? .

Sure. If we could find a period of stability where tariffs, government shutdowns and kinetic actions in Europe and the Middle East don't get in the way, and that's not unique to us. I think the things that we are doing at RPM, the decisions we're making and the execution of our associates is such that in the coming years, you'll see improvement in the gross margin line, you'll see a shrinking of SG&A as a percent of sales. .

And that will have a positive impact on a steady, stable improvement in our margin profile. It's in the cards in terms of what we are doing, and you can see it in Q3, and it's going to get better. All that, notwithstanding, we will be disrupted like everyone else by major raw material inflation or availability if things get worse instead of better both in the Middle East and for that matter and with the Russian war in Ukraine.

Both have a disportionately negative impact on Europe versus North America, Europe being our second largest region.

Got it. And then one quick follow-up on Consumer Group. Acquisitions have been a positive this year. I expect DIY is going to remain sluggish for another year. So when you think about developing growth algorithm for consumer group, do you have to shift a little bit more to acquisitions given the DIY is probably going to stay weak? Or maybe you have any thoughts on DIY for next year?

Sure. We were starting to see some stability, as I indicated, and then concerns about interest rates and raw material costs and pricing, I think, will not help improve the DIY market. You're seeing that from not only us but our peers. We need to focus on 2 things.

We need to focus on categories that are growing, and there are a number of those, including cleaners, which we're pulling together a pretty good cleaner portfolio. And we need to do a better job of driving consumers to our products, whether it's in stores or online.

And so as we become more consumer-centric in our data and our marketing. With all of our retail partners, we need to be driving consumer purchase much more than focused on the retail takeaway. We got to be better at it. We're doing things. We've reallocated our spending in ways that should drive more consumer activity versus focusing on customer traffic and things like that.

We've got to get better at that, and we're spending money towards that. And just to finish that to your point, I think we've come to the conclusion we need to do some things differently because I don't think waiting for a big recovery in that market. It's a good strategy.

I think we and others have communicated that this spring of '24 and then this spring of '25, and then this spring of '26 is when the consumer is going to come back strong. And everybody that's waited for this spring to get better has been incorrect. So we're not waiting anymore.

And our next question today comes from Vincent Andrews at Morgan Stanley.

If I could just ask, Frank, I think you said on the $100 million program. I think you indicated half of that would go to consumer. Is it fair to allocate the balance to the other segments equally? Or would it be a different mix?

I would think it would be fair to allocate the balance roughly along revenue lines. So it will be a little bit heavier at the Construction Products Group and Performance Coatings in part just because they're a larger organization.

Okay. And then just a follow-up on your comments a couple of questions ago in consumer, I believe, about some concerns about demand as a function of raw material costs going up. And I just wanted to better understand whether you were indicating that maybe the large retailers are sort of saying, well, I don't know what things cost right now because every day the price is going up or the price is going down.

So the being even more cautious about their inventory levels as we head into the big selling season or if that was also meant to imply that you actually think this will be an incremental headwind to consumer takeaway or maybe you meant both. So any clarity there would be helpful.

Part of it is related to the big macro there that will help everybody is a pickup in housing turnover, which we've talked about as have others, it's been at 30- or 40-year lows from last year or so. And the anticipation of improving housing turnover and improving new home construction, obviously, a fascination of the Trump administration as well in terms of some of the things they're trying to do anticipated interest rates declining.

And I think with the current inflationary environment expectations to the extent that people think interest rates are not only not declining, but not go on that doesn't help that big macro. I think the other thing, quite candidly, is we and other consumer product companies have learned some lessons about consumer price elasticity.

And so the ability to raise prices when necessary, we have -- we had one super premium spray paint that got over $10 a share and people started trading -- I'm sorry, $10 a can and people started trading down. And so that's just candid.

So whether it's value engineering, whether it is understanding the price points that will move products off the shelf that have nothing to do with raw material costs and/or getting price increases through customers and everything we do with understanding consumer price elasticity.

Those are the reasons that we're cautionary about the current geopolitical activities and their impact on our consumer group.

And our next question comes from Joshua Spector with UBS.

This is Lucas Beaumont on for Josh. So I just wanted to go back to raw materials. So I mean, with oil and [ petchems ] up kind of 30% to 40%, I mean, that would seem to sort of imply that we're added towards more of like a 20% kind of annualized increase in raws over the next kind of 12 to 18 months. So I just sort of wanted to clarify your comments there around moving towards high single digits in the first quarter.

I mean that sort of would be on the pathway to those higher rates, but I just wanted to sort of clarify whether you're thinking you guys are going to see it peak kind of in the first quarter now and expecting things to come back down or if you see that more on a pathway to higher costs, which for PM in particular, is sort of all going to hit your fiscal 2017 year lining up that way.

So you just kind of walk through your assumptions there that would be great.

Sure. So the simple answer is we don't know. We have some insight and I think some foresight into where raw material costs are going. And so I think we're pretty confident in a couple of percent impact in Q4. And I also think we're pretty a range, but pretty confident in the mid- to high single-digit impact in Q1.

Beyond that, we don't know. And your estimation, I think, is not incorrect. If oil prices stay at these high levels and raw material costs stay at these high levels on a sustained basis for all of our fiscal '27 and into '27. Again, as my comments earlier. I think there's a possibility that this is temporary.

And certainly, the whole world hopes for that for a lot of reasons. If not, there's a possibility that we, at least in the manufacturing sector, broadly are facing another by demonstration like inflation spike that's going to last for more than a couple of quarters, and we'll have to adjust accordingly.

And Lucas, I'll just add too, if you look at our raw material basket, a little over half of our raw materials are derived from oil or natural gas. So we actually have several things that aren't derived from those which aren't subject to some of the volatility in the oil prices.

And the other thing is our procurement team has done a really nice job, like Frank talked about with our strategic partnerships and having contracts -- so we aren't a subject to the volatility related to the spot market and maybe as some others are.

But I would add to that, again, I think we are pretty confident in what we see between now and the end of our first quarter. and our confidence level of where things are going after that diminishes very quickly. We don't know. .

Okay. I mean that's helpful. So I guess kind of where I was going with this sort of is the flow on is I mean if we're all kind of up 20, then you guys are going to kind of need high single digits or 10% kind of pricing to recover that over the next 2 years. Because I mean, if see [indiscernible] you don't need it nearly as much. So that's probably going to drive you guys are thinking about your pricing outlook for next year?

And I guess how proactive you're sort of being on that front. So I guess linking it back to pricing, I mean you've talked about sort of going to get more as needed.

So I'm just trying to sort of understand, I guess, how, I guess, proactive or aggressive you kind of feel like you need to be there on the pricing front to kind of get that in place. next year and kind of keep that lag on the price cost kind of impact, I guess, to a minimum.

Sure. Well, we are in the middle of discovering that as we speak. Certainly, we're aware of, for instance, pain competitors have already come out with price increase announcements in the 5% to 7% range and could be doing more.

So there are a lot of dynamics there. But again, we feel pretty good about our outlook for the next 3 or 4 months, 5 months. And beyond that, as I mentioned earlier, we're better positioned to adjust appropriately and more quickly than we've ever been. It just feel volatile right now. I don't know where oil prices are today, $10, $15 below where they were yesterday, who knows where they're going to be tomorrow.

Thank you. And our next question comes from Eric Boyes at Evercore.

Another one on consumer. I think organic sales have contracted now for 4 consecutive quarters. Curious on kind of the volume versus price split for fiscal 3Q if you're able to share that? And then shouldn't we be lapping easier comps in consumer, in particular, starting in fiscal 4Q? And have you seen any kind of organic green shoots in any particular product lines?

Sure. Yes. In consumer, as we discussed, we had negative organic growth in the consumer group. We did have some pricing that came into effect from increases last fall. So that gave us some tailwind. But yes, you're right, the last 4 quarters, we have seen negative volume growth in consumer .

Yes. And as I indicated earlier, it felt like consumer takeaway in the DIY markets were stabilizing. And I will tell you, we're not annualizing easier comps.

We're annualizing 18 or 24 months of easier comps and so the whole industry has been anticipating some stability. It was coming. And now I think the current events are putting into question whether or not a seemingly stabilizing or improving consumer DIY takeaway is going to continue to be challenged.

So that's everybody's expectations for the balance of fiscal '26 and so it's also why we took the actions we took, particularly to the extent that we're focused on our consumer group because we've been waiting for easier comps for 18 months, and they're not coming.

Okay. I appreciate that. And then maybe for the second, can you speak to the structure of the pricing actions? Are those that are being done in response to this Iran situation?

Are they being couched customers potentially is like temporary in nature? I guess I'm trying to understand if all of it will be structural, if or when I ran the escalates.

Sure. First of all, I think when anybody -- any of our competitors, peers come out with a broad comment about price increase, they're typically talking on average, particularly through our RPM we have 3 groups. We have 20 dependent on operating businesses. They operate in different geographies. And then, of course, we have a broad mix of product lines.

And so, while we can tell you, for instance, that price was up in the quarter about 1%, doesn't tell you really anything about where price is up on a particular product line. It could be down competitively in some industrial coatings businesses. It could be up in the high single digits or more in some of our specialty products areas.

And so we are doing that as we speak. For the most part, what we will affect between now and the first quarter, I would guess it will be about 70% price and probably about 30% of temporary adjustments. Those particularly an area that we're particularly looking at surcharges as adjustments that would be temporary on freight.

Mostly, we've talked on this call about raw material costs but the impact on what's happening in the Middle East is impacting freight broadly, whether it's ocean freight, whether it's a truck cost, gas cost for car fleets, you name it. And so that's likely to be dealt with in the near term through surcharges. And then if we are in a sustained inflation in environment, we'll have to figure out if and how and when to make that permanent.

[Operator Instructions] Our next question today comes from Jeff Zekauskas with JPMorgan. Jeff?

On Slide 7, you said that Europe grew 20%, but driven by M&A and [indiscernible] do Europe contract exclusive of M&A and FX in the quarter?

Yes, it did.

By how much? .

I don't know that we disclosed that by region, but it wasn't down meaningfully. We are improving our bottom line. This is consistent with our comments on the last call, we are consolidating production. We're consolidating some distribution.

We're focused on a margin improvement. So the bottom line is performing better than the top line. But the [indiscernible] on Ukraine has not helped economic activity in Europe. The war in the Middle East and Iran is not helping energy costs in our economic activity in Europe. And so that continues to be a challenge. As you noted, most of the growth has come from acquisitions. The [indiscernible] stuff, a couple of other product line acquisitions that I referenced earlier in our Construction Products Group. So broadly speaking, we're flat down in consumer. We are on an organic basis without acquisitions.

We're down slightly in construction products, which really touched on the strength of our Construction Products Group everywhere else, and we're up in our Performance Coatings Group modestly.

Okay. And in answer to one of the previous questions, you talked about experiencing a robust March. And you said April is different. Can you give some kind of quantification to what March was like and what April is like for your overall business?

I don't want to provide much in the way of guidance for Q4, a, because we're in the middle of it other than to say that March was a solid month. And I think a continuation of what we just published on Q3. But given all the activity in the Middle East, we are seeing some projects delayed. We're anticipating some slowdowns that may happen or may not happen. We just went through this in the fall related to the government shutdown.

And so the full impact of raw material costs and the full impact of any disruptions. For instance, we had a really solid Middle East performance in March. But we burned through inventory on what's been really good a really good team there that's taking share and been growing organically in the double-digit range. That's going to come to a halt in April and May because that's the one area where supply is challenged in terms of getting raw materials back into our plants.

It's a modest portion of RPM's business, but it's just one reason why we're hesitant on how we'll finish the quarter because as we experienced in the fall, we had a good first quarter. We had a bank up in September and then the world fell apart for us in November and December.

We came roaring back. And the dynamics of RPM have changed. And if the disruptions of a lot of these geopolitical events we get out of the way. And again, that's almost a silly statement because it applies to everybody. The work that our people have been doing is really improving our business, and you can see it .

And that concludes our question-and-answer session. I would like to turn the conference back over to Frank Sullivan, Chairman and CEO, for any closing remarks.

Good. Thank you to everybody for your participation in our call today. We greatly appreciate your questions and your investment in RPM. While the economic conditions and the geopolitical conditions remain volatile, we are executing very well on the things that we can control. I particularly want to thank the RPM associates globally and those in the Middle East.

We wish for your safety and appreciate everybody's dedicated execution and commitment. Hopefully, we'll be seeing a return to great weather, which will help RPM's performance and we look forward to communicating the results of Q4 and our 2016 fiscal year in July. Thank you, and have a great day.

Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good day, and welcome to the RPM International Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead.

Thank you, Betsy, and welcome to RPM International's conference call for the fiscal 2026 second quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Account Officer. The call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC.

During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments are on an as-adjusted basis and all comparisons were made to the second quarter of fiscal 2025, unless otherwise indicated. We provided a supplemental slide presentation to support our comments on this call that can be accessed in the Presentations & Webcasts section of the RPM website at www.rpminc.com.

As a reminder, certain businesses that were previously part of the Specialty Products Group have been reallocated to other segments effective June 1, 2025. As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. There's no impact on consolidated results.

Now I will turn the call over to Frank.

Thank you, Matt. Today, I'll begin with an overview of our results and cover some recent actions we've taken, followed by Michael Laroche, who will cover the financials in more detail. Matt will then provide an update on cash flow, the balance sheet and our recent acquisition. And then Rusty Gordon will conclude our prepared remarks with our outlook. As always, we'll be happy to answer your questions after our prepared remarks.

Beginning on Slide 3, we achieved record sales during the second quarter, aided by our targeted growth investments. However, momentum slowed as the quarter progressed. We began the quarter with a solid September, actually better on the top line and bottom line than our first quarter results. Then the trend of longer construction project lead times became more pronounced, the DIY demand softened, particularly in late October and through November, resulting in sales declines for those months. The government shutdown contributed to this slowdown as we saw activity in certain construction sectors tied to government funding come to a near standstill and consumer confidence decline. All segments generated positive sales growth for the quarter. However, this was not enough to offset higher expenses, including growth investments and costs from temporary inefficiencies as we continue to consolidate plant and warehouse facilities, resulting in a decline in margins in the quarter.

To better align our SG&A structure with current market demand we are acting quickly to execute optimization actions across the organization. In many ways, this is an acceleration of the SG&A structural realignment we have been preparing as part of a new MAP 3.0 program. Importantly, we also continue to have focused investment in our highest growth opportunities. And on the following slide are some details about what we're doing.

Turning to Slide 4, we estimate that once fully implemented, our optimization actions will yield an annual benefit of approximately $100 million. We have realized $5 million of the benefits in the third quarter with an incremental $20 million in the fourth quarter with the remaining $75 million in fiscal 2027. As we are currently in the process of implementing these changes, we will be an estimate of the implementation cost by the time of our next earnings call in April. We're also continuing our focused investments in areas where we have seen good returns and have opportunities for continuing growth. These include high-performance buildings, business intelligence and innovation.

For high-performance buildings, we are expanding our technical sales force in areas like turnkey roofing and enhancing our system offering through acquisitions. As an example, we purchased an expansion floor joints company, HCG in fiscal 2025, which along with our other complementary RPM products enables us to meet the demanding requirements of high-performance floors. We expect additional acquisitions to expand our system offering similar to the recently announced agreement to acquire Kalzip, which Matt will speak to in a few minutes. We're also investing in improved business intelligence. This includes capitalizing on the Pink Stuff's expertise in leveraging data to develop targeted marketing campaigns across multiple RPM businesses, [ especially ] following several years of ERP integrations, we have been investing in business intelligence to better utilize data company-wide. It is helping to guide decisions and actions in areas such as marketing, pricing and operations.

Finally, innovation has been a core element of RPM's historical growth and through investments in people and facilities like our Innovation Center of Excellence, we have enhanced our product offering across our segments. One example is AlphaGuard PUMA, which is leading waterproofing technology and can be installed at temperatures as low as minus 20 degrees Fahrenheit. Another example [indiscernible] TWB. It is a newly introduced water-based bond breaker that provides a clean separation of panels along with other benefits in the growing tilt up construction market.

In summary, we are accelerating actions to optimize SG&A levels in response to soft market conditions while remaining focused on supporting our best growth opportunities. With our growth investments and the quality of our people, we remain well positioned to continue outpacing our markets, particularly as markets rebound. Lastly, in addition to the actions we announced today, we're in the process of developing our MAP 3.0 program and expect to provide details at our Investor Day event after the conclusion of our 2026 fiscal year.

I'll now turn the call over to Michael Laroche to cover the financials.

Thank you, Frank. On Slide 5, consolidated sales increased 3.5% to a record driven by acquisitions and engineered solutions for high-performance buildings, partially offset by continued DIY softness and longer construction project lead times, partially due to the government shutdown.

Adjusted EBIT declined as top line growth in MAP 2025 benefits were more than offset by higher SG&A expenses from growth initiatives, M&A deal costs, health care and temporary inefficiencies from plant and warehouse facility consolidations. Adjusted EPS declined driven by lower adjusted EBIT and higher interest expense resulting from higher debt levels to finance M&A activity. Geographic results are on Slide 6 with Europe, the fastest-growing region, driven by M&A and FX. North America grew approximately 2% as an increase in high-performance Building Solutions, partially offset by soft demand in DIY and [indiscernible] in emerging markets, growth was led by Africa and the Middle East as they continue to have success serving high-performance building and infrastructure projects.

Moving to Slide 7. Construction Products Group sales grew to a record led by solutions for high-performance buildings. Project lead times lengthened as the quarter progressed, driven by the extended government shutdown. Additionally, weak sales in the disaster restoration business due to lower storm activity this year was a drag on growth. SG&A growth investments, temporary inefficiencies from plant consolidations and lower fixed cost absorption at businesses with volume declines more than offset MAP 2025 benefits and led to a decline in adjusted EBIT.

Next, on Slide 8. Performance Coatings Group achieved record sales with broad-based growth across its businesses. Acquisitions also contributed to the growth. Adjusted EBIT was approximately flat as higher sales and MAP 2025 benefits were offset by growth investments and unfavorable mix. Consumer Group results are on Slide 9. M&A and pricing to recover inflation drove the sales growth as volumes declined, we saw DIY demand, particularly in November. Additionally, some sales were delayed as a result of software system implementations and the transition to a shared distribution center in Europe. Continued product rationalization also negatively impacted sales.

Adjusted EBIT declined due to lower volumes, temporary inefficiencies from footprint consolidation and start-up of the shared distribution center in Europe. Additionally, lower demand of the [ Color ] Group also weighed on margins. In our Cleaners business, the integration of the Star Brands Group, the parent of the Pink Stuff remains on track. However, we reversed a $12.7 million liability associated with an earn-out for this acquisition. This earn-out liability was originally calculated based on a probability weighted sales forecast, and much of the value was driven by more aggressive sales scenarios. Current forecasts are more in line with our base case assumptions and the aggressive targets needed to achieve the earn-out are unlikely to be met, which is driving a reversal. This $12.7 million gain has been excluded from our adjusted EBIT.

Now I'll turn the call over to Matt who will cover the balance sheet and cash flow.

Thank you, Mike. Starting with cash flow from operations on Slide 10. It was up $66.3 million in the second quarter compared to the prior year with the increase attributable to improved working capital efficiency. This is the second highest second quarter in the company's history and helped us pay down $127 million in debt in the first half of the year, and that's in addition to returning $169 million to shareholders through dividends and share repurchases and spending $162 million on acquisitions. We are proud that in October, we increased our dividend for the 52nd consecutive year. This is a testament to our steady cash flow and our strategically balanced business model and focus on maintenance and repair.

Liquidity remains strong at $1.1 billion, and combined with the strong balance sheet, we have a high level of flexibility in capital allocation decisions. As an example, yesterday, we announced an agreement to acquire a company that will strengthen our systems offering for high-performance buildings that Frank discussed earlier.

Turning to Slide 11, you'll see more information on the agreement to acquire Kalzip. They are a German-based leader in metal-based roofing and facades, which is a fast-growing part of the construction market because of their durability, lower maintenance and high performance. The incorporation of Kalzip products into our existing offerings will strengthen CPG's ability to provide building on help systems that enhance efficiency, durability and aesthetics, while also meeting or exceeding demanding specifications. The company had calendar year 2024 sales of approximately EUR 75 million, and the acquisition is expected to close in our fiscal fourth quarter of 2026.

Now I'd like to turn the call over to Rusty to cover the outlook.

Thank you, Matt. Our outlook for the third quarter can be found on Slide 12. Market conditions are expected to remain sluggish with soft DIY demand and continued longer lead times for construction projects.

We are encouraged to see that construction pipelines remain solid, although visibility of when this pipeline converts to actual construction activity remains unclear. Despite these macro challenges, we expect to outgrow our underlying markets. Thanks to the targeted growth investments we have been making, we will also benefit from the implementation of SG&A focused optimization actions, as Frank mentioned, although in the third quarter, that will be offset by continued health care inflation and an ideal expenses.

Overall, we expect consolidated sales to increase by mid-single digits in the quarter. By segment, consumer is expected to grow sales moderately more than PCG and CPG due to acquisitions. We anticipate adjusted EBIT will grow mid- to high single digits during the quarter. Moving to our fourth quarter outlook on Slide 13. We expect sales to grow in the mid-single-digit range. With our solid construction project pipeline, we expect some of the projects that were delayed to convert into activity by the end of the year. Also, if weather delayed some projects from the third quarter as we saw last year, we expect most of these to be realized in the fourth quarter. We will continue to benefit from acquisitions and the targeted growth investments we have been making, along with our resilient repair and maintenance focus and ability to sell engineered systems and solutions to high-performance buildings.

In the fourth quarter, we'll also see more of the incremental benefit from the SG&A focused actions that we are currently implementing and should more than offset higher health care and M&A deal expenses. Taking all of this into account, we anticipate adjusted EBIT in the fourth quarter will be a low to high single digits with volume growth being the key variable. This concludes our prepared remarks, and we are now happy to answer your questions.

[Operator Instructions] The first question today comes from Ghansham Panjabi with Baird.

So I guess starting off with maybe Slide 3 where you have the organic sales breakdown during the quarter. I know it can vary quite a bit on a monthly basis depending on comps, et cetera. But could you give us a bit more color as to how the business has specifically performed? The 3 operating segments was just trying to get a sense as to whether the deterioration was specific to construction and then also consumer or the performance also getting impacted.

Sure. So if you look at -- this is kind of unique, and I don't expect us to do this very often in the future. But when we provided guidance on our last investor call, the latest information we had was in September. And the unique element is talking about months, which we are in this call. Actually, in September, we saw margin improvement and solid growth at the Construction Products Group and the Performance Coatings Group and some continued weakness, which has been pretty prevalent across the whole peer group and consumer. Pretty much across the board as we got into the back half of October and into November, we saw a deterioration across all 3 of our segments.

Got you. And then in terms of the $100 million SG&A initiative that you outlined, how much of that should we assume is temporary versus permanent? And is that just a reappropriation of spending relative to the previous growth investments? I'm just trying to get a sense as to whether you've curtailed some of those growth investments as well, just given the change in the operating conditions.

Sure. As you know, we've been working on a new MAP 3.0, not sure what we're going to call it yet. And like a lot of folks have kind of put off longer-term forecasts in the midst of all the tariff disruptions and other elements. It's our expectation, regardless of where the markets are that we would provide details this summer, whether it's on our July call or perhaps an Investor Day. So we have been preparing for that with our leadership team and our Board. So to a certain extent, the disappointing kind of market downturn, which is hopefully temporary, accelerated some of our thinking there. The $100 million is roughly $70 million in personnel-related risks across the globe and about $30 million in discretionary expense reductions.

The next question comes from Matthew DeYoe with Bank of America.

The fiscal 3Q and 4Q guidance seems to imply much better incremental margins, maybe not great, but certainly better than where we were. Can you help provide a little bit more confidence as to the rate of change of the fixed cost absorption as we move through fiscal 3Q and into 4Q?

Sure. So a couple of things. Number one, we're rounding easier comps, and so that will certainly help us. Secondly, the structural SG&A actions that we announced today and that we are implementing as we speak, will add to that leverage in ways that we weren't seeing in the first half of the year. And then I think secondly, with some improvement in unit volume growth, which we anticipate. You'll see a reversal in absorption, which hurt us mightily in Q2 as unit volumes declined in October and November. And to the extent they improve in the third and fourth quarter, that will be a nice swing both versus Q2 and also last year.

All right. And as I think about some of the acquisitions that are starting to layer in at a decent clip here. I mean, how should we think about EBIT accretion from this? Is this are these deals kind of like non-EBIT accretive given D&A write-up? Or is it at margin, above margin? How should we think about the layering in there?

Sure. It takes some time for these to get integrated into -- particularly in our Construction Products Group, where most of these have happened. One of the areas for real possible strength for us in the second half, for instance, is Pure Air. It was an reconditioning and rehabilitation project or product system that we acquired a couple of years ago. It took us longer than we thought to get properly certified in every state, and we are starting to get traction there.

And so I think an 18-month to 2-year cycle is the right way to think about -- for instance, a Kalzip, high-margin, unique metal roofing business in Germany, both some basic core stuff that we're in terms of metal roofing and some high-profile projects, principally a European business. So back to that 18 to 24 months, I think that's the right time frame to think about how we can integrate that into a Tremco CPG distribution and sales effort more globally.

I guess I appreciate that from an operating integration perspective, would that also kind of align with earnings accretion as well?

Absolutely. So in the early years of a pure error, not really accretive. And I believe as we get into calendar '26, and certainly, the back half of fiscal '26, what's a relatively small acquisition will be nicely accretive.

The next question comes from Arun Viswanathan with RBC Capital Markets.

I guess I just wanted to ask about maybe some of the transitory costs you guys incurred this quarter. How much would you attribute maybe to the [ government ] down and as well as increased SG&A spending? And how do you see that trending as you go forward?

Sure, Arun. This is Rusty here. In terms of some of the transitory costs, we did get hit hard on absorption and higher converged costs. Part of that is due to the plant shutdowns going on and transition of facilities. We also opened up a shared distribution center in Europe with some inefficiencies at the outset, which will be resolved as we get up to speed there. So in total, we lost almost 1 percentage point in margin just on higher conversion costs. Some of that was volume driven, maybe $4 million, $5 million of that was due to transition of facilities, whether it's shutdowns or changes in distribution. So hopefully, that gives you some color.

Great. And as you look out maybe into the second half of fiscal '26 and into '27, what would be the run rate on some of the savings? I know that you will capture a portion as you said, maybe $5 million here in the third quarter. But when do you expect to see the full amount of that savings kind of flowing through the P&L?

Sure. I think the full amount will start to flow through in Q1 of '27. We are executing as we speak, what will be about a $25 million per quarter run rate. And we would expect most of that activity to be completed and announced internally by the end of Q3.

The next question comes from John McNulty with BMO Capital Markets.

Maybe a question on the 4Q outlook because 3Q is so seasonally light, it probably doesn't matter all that much. You've got a pretty wide range, low single-digit to high single-digit growth in EBIT. And I know in some prepared remarks, you commented that it's largely contingent on volumes. Is the high end of the range assuming the world starts to feel better again? Or is that just the recapturing of maybe some lost business around the government shutdowns, I guess maybe you can peel back the young in a little bit in terms of what gets you to the low end of that range and what gets you to the high end?

Sure. As for the lost business relative to government shutdown to the extent that's real, I would expect us to see that pick up in Q3. Q4 really is about volume. We will be rounding 2 years of challenging consumer takeaway volume growth in consumer. So we'll be seeing easier comps there. Part of the changes we've made with this SG&A structural realignment in our consumer business with what we hope will be a positive effect to margin in the bottom line. And we have a really strong backlog in our industrial business in both CPG and PCG. If that becomes to be realized, again, you'll see us have a pretty good fourth quarter.

But given the volatility that we're experiencing just in this quarter, are really solid by any measure, September and that are really disappointing by any measure in November makes us a little hesitant to be more specific about coming months because that volatility seems to be continuing.

Okay. Fair enough. And then I guess, just given the general weak environment that continues, if anything, maybe it got a little bit worse overall, I guess, can you speak to what you're seeing from a raw material perspective, are you starting to see any signs of relief? I know tariffs kind of made that a little more difficult over the last few quarters. I guess, what is your outlook as you're looking forward?

Sure. I'll let Matt provide some specifics. But generally, the trends that we're seeing both in the marketplace and geopolitically suggest that, that should be a tailwind for us in the second half of the year.

Yes. So absent tariffs, yes, we are seeing raw material inflation coming down and even turning into deflation, but you have these pockets of inflation in some of the categories we've talked about in the past, that continues and these are really tariff driven. So leading in metal packaging, that's up low teens, epoxy resins are actually up high single digits. And then we have some specific categories that really can only be sourced from Asia. These are more niche products, not a huge dollar spend, but when you're facing tariffs of 20%, 30%, 50%, it can add up. And so all in all, taking all into account, we expect a little bit of inflation in the third and fourth quarter, but that's all tariff driven.

And again, I think geopolitically where underlying base chemicals are going. We would expect that to be a tailwind. And as we get into Q4 and certainly into fiscal '27, we will be annualizing the impact of tariffs, for instance, on steel packaging.

Okay. Got it. Fair enough. And maybe if I could slip in one last one. Just on the Pink Stuff earnout, I know there were kind of a wide range of outcomes in terms of how much you kind of felt like you could really drive that business. I guess what now are the base expectations since you took down that earn out a bit? I guess how should we be thinking about where that business can go over the next few years?

Sure. The Pink Stuff acquisition is on track for our base case as Mike alluded to. The earnout was a relatively short 2-year earnout, and it was based on double-digit unit volume growth. And in this environment, we are not hitting double-digit unit growth and we don't expect to in calendar '26. And so that was the basis for the reversal of the earnout.

The next question comes from Patrick Cunningham with Citi.

Just on the weakness in Consumer Group, how much would you attribute to underlying market softness versus some of the other things you called out like sales delays or targeted product rationalization?

I think most of it has been underlying consumer takeaway. And again, it got weaker. It picked up a little bit in September. We had solid results across all our businesses in that month and then it got weaker in the quarter as it progressed, understanding how much of that is government shutdown and other issues, it's hard to know. We're also approaching year-end for a lot of the major retailers. So there continues to be working capital inventory management levels there.

As I said earlier, we will be rounding as we get into calendar '26, 2 years of easier comps. And so I think we will see better results in the second half of fiscal '26 and better results in fiscal '27 for consumer. We don't need a roaring comeback to start seeing unit volume going in the right direction, which will accrete to our bottom line nicely.

Understood. And then just on price realization, where did price shake out in fiscal 2Q? And has there been any tension on getting full realization in the consumer group given the weak demand environment and some disinflation on the raw side?

Price was less than 1% in Q2. And I would anticipate about the same in Q3, unless, of course, we see any material spikes. And we have not had a real challenge over the last couple of years in terms of getting price where needed. In consumer, in particular, we did bump into some price elasticity issues relative to price points at retail and we have adjusted accordingly. That was really a spring of '25 phenomenon, not Q2.

Next question comes from Mike Harrison with Seaport Research Partners.

Was hoping that we could just dig in a little bit more on this impact from the software system implementation in consumer sales, and it felt like maybe EBIT, too. Is that implementation now complete? Or should we still expect maybe some delays or impacts in Q3? And I guess to the extent that sales were delayed, are you realizing those sales then in Q3? Or is it going to take longer for those sales to materialize?

Yes, Mike, this is Rusty here. Yes, that was temporary. We have resolved that. It was a simple matter of new systems as well as a new warehouse in Europe. The new system was implemented in a couple of places in consumer. But we are up and fully running. So yes, that was a temporary situation.

All right. And then within the Performance Coatings business, you noted broad-based growth really across that business. I was hoping you could give a little more color on what portions of the business are particularly encouraging to you as you look out over the next few quarters?

Sure. Our Stonhard flooring business is continuing to grow nicely, really industrial capital spending and onshoring. Fibergrate is benefiting from a lot of the data center build-out a lot of their functional systems are used in multiple areas there. And so those are 2, probably the strongest areas. And we're also picking up some market share, a little bit of expensive margin in our Carboline business.

The next question comes from Frank Mitsch with Fermium Research.

I must say I am a fan of the granularity that you provided in Slide 3. Obviously, it shows a how the quarter started out pretty good, therefore, leading to some optism in terms of the quarter, fiscal second quarter, but then deteriorated in October and November. That trend does not look like to be your friend. Here we are on January 8. How did December turn out?

Sure. Well, as I said earlier, it's not been our habit, and I'd like very quickly in the next earnings call to get off this habit of talking about monthly results, but December is over. And here in lies the conundrum volatility, our December sales were up 12.1%. Unit volume was up 7%. And so how much of that is a pickup of Q2 government shutdown related recovery? And how much of that is underlying the strength in the areas that we're continuing to invest in was actually across the board. So we did see a little pickup in consumer, but a significant pickup in construction products in our Roofing business.

So we're off to a great start in December. The challenge we have is understanding what that number means. And how much of that is really a pickup of what was a temporarily weaker Q2. How much of that indicates that things are moving in the right direction. It's anybody's guess as to whether January and February will look like December or whether it will look like November. And so I think that's why we have the wider range that we have in our Q3 and Q4 forecast.

Wow, that's -- that I did not expect that answer. And let me drill down just a little bit. I know you're not in the habit of giving monthly sales, but I'm just curious, it begs the question, is there anything with the year ago result? Was there an artificially depressed December of '24? Was there a super November of '24. Is there anything in the year ago comps? Or that would have led to the negative 6 November, positive 12 December? Or this is really the kind of underlying business as you see it right now?

You'll recall, we had a weak third quarter last year. A lot of that was winter weather related. So certainly, we're rounding some easier comps. And I think that's a part of why we're confident in the second half, albeit within a range of generating solid sales and earnings growth in Q3 and Q4. And so that's part of the answer.

The next question comes from John Roberts with Mizuho.

Aside from disaster restoration, would you say that weather was not a factor in either the quarter or December so far?

No. I think weather was a factor. We got hit pretty hard across the country in the Thanksgiving kind of late November period with heavy snow and that continued into December. We're certainly seeing a relief in that right now. And so I don't expect year-over-year for that to be a big issue in Q3 because we got collaborated last year. And so year-over-year, I think the trends are moving in the right direction, both versus easier comps, how we're starting the quarter and the impact of the acceleration of our SG&A realignment, which will not necessarily impact Q3 much. It will impact Q3 in the last month, but will start to be realized more fully in Q4.

And do you compete at all against BASF's Industrial Coatings business or any of the areas of overlap between Axalta and AXO's industrial coatings businesses. I don't perceived -- there's a lot of opportunities for share gain as there's maybe some disruption across those businesses. But is there -- are there any key areas of overlap?

We have a $400 million high performance industrial coatings business that's part of our Performance Coatings Group. They're really focused on wood stains and finishes real nice market share in what's left of that business, cabinetry, doors, windows in North America. And that business is actually growing. We're picking up share in a couple of places. It incorporates our TCI Powder Coatings business as well as a small but growing OEM liquid metal business.

And so that's an area where I would expect us to continue to grow. We reorganized that into a comprehensive business from about 4 or 5 different separate pieces. And that reorganization, what we're doing at the R&D center in [indiscernible], which is primarily owned by our RPM OEM coatings business. It's actually a bright spot for us right now despite economic problems.

The next question comes from Kevin McCarthy with Vertical Research Partners.

A question on M&A. Can you talk through why you decided to pursue Kalzip. And then more broadly, if I look at the recent acquisitions, many of them are domiciled in Europe. And I was wondering if you could speak to that. Is that strategic on your part or just simply a function of where you're seeing the best value or opportunities now?

So the simple answer is yes to both. Very strategic, in M&A. It's also what's available for sale at a value that makes sense for us. We sell tens of millions of dollars of purchase for resale, metal roofing in the U.S. And we have been looking for opportunities to enhance that purchase for resale with stuff that we own and control.

Kalzip is a unique asset, German-based, their specialty is actually a lot of high-profile projects, which we're not in. And so we're pretty excited about the ability to take some of their patented technology, bring it to the U.S. and accelerate the metal roofing elements of what some of our Tremco Roofing salesmen are already selling as well as helping to expand that metal roofing capability globally. Kalzip has had projects in Europe, Middle East and Asia, areas where our Tremco Roofing business is not really present. So we're pretty excited about it.

As I commented earlier, it's a real strategic play. It's going to take us some time to take that technology and bring it into the U.S. But when we do the opportunities for us to add tens of millions of dollars or more in the U.S. market where we have an awesome sales force. On top of what's about a EUR 75 million revenue business is something we're pretty excited about.

Very good. And then secondly, if I may, I want to revisit the subject of pricing. I think you said in response to a prior question that the price contribution was less than 1% in the quarter. And I was somewhat surprised to hear that. My recollection was that you were targeting higher contributions and acceleration into the fiscal second quarter. So just wondering if you could just unpack that and talk a little bit about where you're seeing the most and least traction and maybe segment contributions and whether or not you might anticipate any acceleration on price in the back half of the year?

Sure. Again, it will be circumstantial. We're past the period of heavy inflation that drove price increases meaningfully across all of our businesses. And so in the quarter, less than 1% but we got more price in consumer because that's the place where we're having the biggest challenge. Again, it's the place where metal packaging has got the biggest impact across RPM.

And then selectively, for instance, around epoxy resins and a few other places, we're getting price in selected product categories across the board like we were a few years ago.

The next question comes from Mike Sison with Wells Fargo.

I guess, with your outlook for the third and fourth quarter for sales growth, how much are you expecting that to be organic sales growth and acquisitions? And I know you have a lot of acquisitions in there. So just curious if you had a sort of a feel for how much organic growth is embedded in the third and fourth quarter sales outlook?

Okay. I think we're back on a temporary drop there. In response to Mike Sison's question, can you hear me? [Technical Difficulty].

Okay. So I'll just point back to the monthly information we provided. You saw what we talked about in Q1. We talked about on Slide 3, the unit volume growth month by month, September, October, November, I just provided it for December. And it's our expectation that the focused growth investments that we are talking about drive organic growth. That's how we're going to leverage to the bottom line. And we provide quarter-by-quarter, the breakout between organic growth, FX and acquisitions. But it's our expectation that we will be seeing better organic growth in the second half as a result of the comments we've made earlier, easier comps, focused growth investments and hopefully, some improvement in market dynamics.

But given the volatility we're seeing, again, it's anybody's guess as to whether January and February and subsequent months, look like November or December that were starkly different and perhaps a little bit of an average given the impact of the government shutdown. It's hard for us to know what that is. But I can tell you for us in every business, the negative impact of the shutdown was greater than 0.

Got it. And then I guess for the third quarter, with the outlook being mid-single digits in December doing pretty strong. I mean does that imply that January and February has tough comps, it might be negative? Or do you think we'll just be positive for the rest of the way?

I think we'll be positive, but I don't know. And we will learn in January, for instance, how much of the real strength in December was picking up lost business in Q2 because of the government shutdown or how much of it is a release, for instance, of some of the good backlog that we continue to build in our Construction Products Group and our Performance Coatings Group. And so if we had higher confidence, we'd be putting out maybe a better forecast. But given the volatility we're experiencing, it's hard to know as we sit here today.

The next question comes from Josh Spector with UBS.

I just have 2 quick follow-ups here. First, just going back to the transitory costs. I think last quarter, you guys framed it at about $30 million, and you had roughly equal buckets between health care some of the plant consolidation and then SG&A growth. Is that the right number that was in the August quarter? And can you help us think about what that looks like over the next couple of quarters?

Sure. Yes. Josh, looking at second quarter, health care was still an issue. We had probably in the $6 million, $7 million range of higher health care costs. In terms of the impact -- unfavorable impact on conversion costs, like I mentioned, that was about 1% of sales hitting our margins. So that's close to $20 million. And what was the third category you talked about?

I believe you had the plant consolidation. The SG&A investment, I think, is the third one.

Yes. The SG&A investment is continuing, of course, on a more selective basis given the risk activity we're talking about.

Okay. I guess then just on that last point with the SG&A. I mean, someone asked earlier about your saving costs, you're investing. Are you then investing less in some of the savings is that you're moving people around there? Or are you cutting people around that? And I think just one other follow-up to sneak in there is that you said the cash costs, we won't know until April, I believe, but you think those costs are going to be ramping up over the next couple of months. So would there be like a $60 million, $70 million charge for that coming shortly?

Yes. The details will provide in April, but 2/3 of that will be realized here in the next few weeks and 1/3 will play out into the spring, particularly related to notice provisions and things like that in certain countries outside of the U.S.

In terms of your earlier question, some of our expense reduction activities on a gross basis will be higher than the numbers we provided. And then we are reallocating some of those dollars into our best opportunities for growth. And so certain of this is expense reduction and a structural realignment that we had working on for some time, given the challenging performance in October and November. We saw that as an opportunity to accelerate that. and others of it is a reallocation of growth capital in our P&L from certain areas that aren't growing to areas that are growing nicely and we continue -- we intend to continue to support that.

The next question comes from David Begleiter with Deutsche Bank.

Frank, staying on the cost issue. Of the MAP 3.0 savings, how much is being pulled into this program? Is it the majority? Is it a minority? Or is it a large amount?

As we've laid out, the plans that we're executing today on a net basis will have about $100 million impact, $75 million of that will be a net additional to fiscal '27. And then we will provide more detail, as I said, either in our July call or a separate Investor Day about the details of MAP 3.0 that will incorporate manufacturing efficiency, procurement as well as a more methodical approach to SG&A. And so it will be at least $75 million, but likely higher. But again, the details will be provided this summer.

And of these costs you laid out today, how much are manufacturing versus SG&A? And are you closing plants, obviously, you're firing people, but what functions are those people doing today? And how are they being replaced?

So in some instances, it's a reallocation of certain spending from one place to another. Of the $100 million, probably $10 million or $15 million will impact cost of goods sold, but the balance of it will be in SG&A. And again, in terms of more specifics, we'll provide it in April as we are in the midst of executing right now.

The next question comes from Vincent Andrews with Morgan Stanley.

If I could ask on the government -- on the government shutdown, can you just talk a little bit about how much of your sales are sold directly to government contractors in the different segments? -- versus sales to traditional customers that are working on projects might be funded by the government. Are we talking 5%, plus or minus, is that the order of magnitude. And so when that goes to 0, it's meaningful. Maybe we can start there.

Sure. We don't sell a lot direct to the federal government. A lot of it has to do with state and local spending that's tied to some government subsidies. So for instance, in schools, there are a number of state and federal programs, education, particularly impacting our Construction Products Group. Probably 20% of their revenues is tied to the education market.

And so you saw both government shutdown lines and, let's call it, Washington dysfunction wise, some dynamics that rose the different funding elements of public education. We're starting to see that unfreeze, which is a good thing. And so it's more the follow-on effect of education funding and some infrastructure as opposed to any specific direct business. We don't do much, if any, direct GSA business, for instance.

Okay. That's helpful. And then on the $100 million, if you could just help us think about how that's going to be spread across the 3 segments, that would be helpful.

Sure. We'll provide that detail in April. We are in the midst of executing and people deserve to understand what's happening within RPM before people hear it publicly. I pretty much that simple.

The next question comes from Jeff Zekauskas with JPMorgan.

In fiscal 2025, your SG&A growth was pretty flat. And for the first 2 quarters of the year, it's up about 10%, which is about $50 million a quarter. Can you speak in general to what exactly has happened? And when you talk about a $100 million reduction in SG&A, what are you trying to accomplish with this? What [indiscernible] to the overall rate of your SG&A growth?

Sure. I would tell you, broadly speaking, in terms of expenses, I think of it as in 3 categories. One is some higher corporate expenses related to health care, insurance, and in particular, which is on M&A, we've done a lot of M&A transactions overseas, and they have a higher complete -- cost rate versus what we do in the U.S. And so that's part of it.

The second one is some of the follow-ons to the MAP initiatives in terms of finalizing plant consolidations and/or consolidating distribution and warehousing. I'll give you one example of what that is practically the largest North American plant, actually, the largest plant globally for Tremco was in Canada. We sold that plant 2 years ago and have had a window to move all that production to mostly United States, had nothing to do with geopolitics. It was a plant that was in the stick 30 years ago in suburban Toronto has been surrounding that plant. And so we had an opportunity to sell that for a nice price, recognizing we were getting regulatorily moved out of that space.

We are incurring duplicate inventory. We are incurring duplicate production costs as we move that mostly from Toronto to Georgia and Texas and that should be completed by the end of March. So that is the type of duplicate conversion costs that we're seeing there. We're also seeing it in Europe and parts of the U.S. as we consolidate distribution, all of which should make us more efficient in the future, but which right now is hurting us.

And the third category, Jeff, is what we've talked about growth investments. we had a deliberate belief that we could invest in certain areas after frustrating 1.5 years of low growth, no growth or 2 years of low growth, no growth environment. And that was proving true through 5 months. We had better growth rates in most categories than our peers. September reinforced that because sales, organic growth and leverage to the bottom line was actually better than [indiscernible]. And for some reasons, we understand in some reasons, we're just guessing at that fell up part in October and November. Last comment I'll make is that the structural SG&A changes are things that we've been working on for some time. And as I commented, we made the decision to put off communications on a new long-term strategic plan until this summer. So a lot of this is work in progress as opposed to a quick reaction to short -- hopefully, a short-term temporary downturn.

And then quickly, for your acquisition effects in fiscal '26, are they accretive to your margins? Or do they trim your margins?

So in fiscal '26, end of fiscal '25 and fiscal '26. They have hurt our margins. Most of that is transaction costs. We have significant transaction costs for instance, on the Pink Stuff and Ready Seal that was at the end of last fiscal year and into the first quarter. Most of these small transactions that I've talked about have been overseas in our Construction Products Group. We're very excited about them, but they carry a relatively higher transaction costs in terms of legal fees and due diligence fees relative to the size of the revenues.

Excluding transaction costs, which, of course, flows through our P&L, they're modestly accretive, and we expect them to be very nicely accretive in the coming years. But for the first half of fiscal '26, they have hurt us and been dilutive [indiscernible] because of the high cost, and we referenced that as part of the higher corporate expense.

[Operator Instructions] The next question comes from Aleksey Yefremov with KeyBanc Capital Markets.

I think you mentioned earlier, backlogs remain healthy. So should we take it as your backlog today are saying or higher than 3 months ago or heavier backlogs declined?

So our backlogs are stable in our Performance Coatings Group and our backlogs continue to grow in the Construction Products Group.

Got it. And in terms of facilities consolidations, I mean you talked about first half of this fiscal year, could you give us any sense of what you expect in terms of future actions in the second half of '26 and perhaps in '27 even directionally, are facilities consolidation is going to continue at about the same pace or higher or lower pace of costs related to these actions?

So we're developing that. And again, details on a broader longer-term approach or something we expect to communicate publicly this summer.

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

Thank you, and thank you for participating on today's call. We're executing an SG&A structural realignment that we see as a down payment on our new long-term strategic plan. We look forward to providing details on a new MAP 3.0 later this year. In the meantime, we are focused on outgrowing our underlying markets and controlling what we can. This strategy will help us navigate the current economic challenges and volatility, and position us for outperformance as markets recover. Thank you again for your participation on our call today, and we wish everybody a happy new year.

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

Good day, and welcome to the RPM International Fiscal 2026 First Quarter earnings conference call. Please note, this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead.

Thank you, Clowie, and welcome to RPM International's conference call for the fiscal 2026 first quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. 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 a -- on an as-adjusted basis and all comparisons are to the first quarter of fiscal 2025 unless otherwise indicated.

We have provided a supplemental slide presentation to support our comments on this call, and It can be accessed in the Presentations and Webcasts section of the RPM website. As a reminder, certain businesses that are previously part of the Specialty Products group have been reallocated to other segments effective June 1, 2025. As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. This change has no impact on consolidated results.

With that, I would like to turn the call over to Frank.

Thank you, Matt, and good morning. I'll start the call with a high-level overview of our first quarter results, followed by Michael Laroche, who will cover the financials in more detail. Matt will then provide an update on cash flow and the balance sheet and provide some details on our Industrial Coatings group. Rusty Gordon will then conclude our prepared remarks with our outlook for the second quarter and fiscal year 2026.

As always, we'll be happy to answer your questions after our prepared remarks. Looking at Slide 3. The pivot to growth I discussed over the last few quarters was on full display with organic revenue growth complemented by the successful integration of strategic acquisitions. All segments achieved record quarterly sales and generated 6% growth or better in what continues to be a challenging macro environment. All 3 segments increased adjusted EBIT to achieve another record quarter for RPM, thanks to the sales growth and MAP 2025 benefits, which offset several other profitability headwinds.

The first quarter represents the 14th time in the last 15 quarters where we have achieved record adjusted EBIT. This is a credit to our associates. We're focused on realizing the power of RPM by leveraging our entrepreneurial spirit to grow sales, while continuing to work to find new ways to operate more efficiently. Next, on Slide 4 are examples of the key factors that allowed us to achieve record results in the first quarter despite the challenging demand backdrop. These include turnkey offerings in roofing and flooring where we both supply and apply the product, a competitive advantage in a labor-constrained construction market, customer-focused new product introductions, strategic M&A in core categories as well as in new adjacent categories.

Engineered solutions that meet and exceed the demanding specifications of building projects in areas such as infrastructure, data centers, schools, hospitals and pharmaceutical manufacturing. System selling that offers comprehensive solutions for all 6 sides of the building envelope, a focus on repair and maintenance, which offers a compelling value proposition and where demand is less volatile than new construction; hiring additional sales and sales support staff across our Construction Products Group and Performance Coatings Group segment in contrast with many of our competitors; and continuously implementing efficiency initiatives built on the legacy of our MAP to Growth and MAP 2025 achievements.

These include the consolidation of 6 facilities currently in process. Over the last 6 to 9 months, we have been talking about a pivot to growth in a frustratingly no-growth environment. To make a pivot to growth, we recognize that we would have to do some things differently. Today, we are doing many things differently while most of our competitors are responding to the no-growth environment by cutting costs, reducing headcount and suspending benefits.

We are expanding sales associates and support staff, a $5.3 million in additional spending in Q1 over the prior year of new employees in this area. We are increasing advertising, especially in our continuing to be challenged consumer business with year-over-year advertising up $3.2 million, and we are rebuilding our M&A pipeline with $2.1 million of higher acquisition-related costs in Q1, while we are maintaining all of our benefit programs, including our 401(k) match which is roughly the equivalent of $0.06 per share per quarter.

These growth investments are having the desired outcome with unit volume growth in our Construction Products Group, up 4% despite negative construction market dynamics and unit volume growth up 8% in our Performance Coatings Group, pretty remarkable in any environment. These self-help measures have been drivers of our recent results and remain critical elements of our coming success. I'll now turn the call over to Mike Laroche to cover the financials in more detail.

Thank you, Frank. On Slide 5, consolidated sales increased 7.4% to a record with a nice balance between organic and M&A growth. Key drivers included items Frank just mentioned, led by systems and turnkey solutions for high-performance buildings and a focus on maintenance and repair. Q1 adjusted EBIT increased 2.9% to a record as volume growth allowed us to leverage MAP 2025 initiatives and overcome headwinds from higher raw material costs and temporary cost inefficiencies from plant consolidations.

SG&A as a percentage of sales increased, it was due to higher health care costs, which was up $8.8 million over the prior year, higher M&A expense as well as investment in growth initiatives. First quarter adjusted EPS was a record $1.88 driven by adjusted EPS improvement, adjusted EBIT improvement partially offset by an increase in interest expense resulting from higher debt levels from acquisition financing.

Moving to our geographic results on Slide 6. Growth was led by Europe, which benefited from acquisitions and favorable FX. North America grew 5.9%, driven by systems and turnkey solutions for high-performance buildings. Performance in emerging markets was mixed, with strength in Africa and Middle East, driven by infrastructure and other projects with pending specifications.

Segment results begin on Slide 7. Construction Products Group sales increased to a record driven by systems and turnkey roofing solutions serving high-performance buildings and infrastructure projects. This was partially offset by softness in Europe and the disaster restoration business has increased demand last year related to hurricane activity did not repeat. MAP 2025 and higher sales drove the record adjusted EBIT, which was in addition to strong growth in the prior year. This was partially offset by temporary inefficiencies from plant consolidations and SG&A growth investments.

Performance Coating Group is on Slide 8. The segment achieved record sales with broad-based strength in turnkey flooring, protective coatings and specialty OEM. Acquisitions also contributed to the sales increase. Adjusted EBIT was a record driven by higher sales and MAP 2025 benefits, partially offset by growth investments and unfavorable mix. These record results were in addition to strong growth in the prior year.

On Slide 9, the Consumer Group sales increased to a record as a result of the successful integration of the Pink Stuff and Ready Seal acquisitions. DIY demand remained soft, and product rationalization also had a negative impact on sales. Adjusted EBIT increased driven by acquired businesses with accretive margins and MAP 2025 benefits, which were partially offset by cost inflation, reduced fixed cost utilization from lower volumes, temporary inefficiencies from plant consolidation and increased marketing expenses. Now I'll turn the call over to Matt, who will cover the balance sheet, cash flow and the Industrial Coatings Group.

Thank you, Mike. Two key hallmarks of our MAP 2025 program have been improved profitability and working capital efficiency. These have enabled us to enter fiscal year '26 with a strong balance sheet even after having the largest share of acquisitions in the company's history in fiscal 2025. We utilized the strong financial position in the first quarter to acquire Ready Seal, a leader in exterior wood stains. This easy-to-use product strengthens our offerings in this category and demonstrates our focus on expanding in core and adjacent markets. .

Although we have increased our M&A activity, our balance sheet remains healthy with low leverage ratios and liquidity of $933 million at the end of the first quarter, which positions us to take advantage of future strategic opportunities. During the first quarter, we also returned $82 million to shareholders through dividends and share repurchases. CapEx increased $11.7 million from the prior year, driven by growth investments, including the purchase of RPM's recently constructed Malaysia plan.

Inventory increases were driven by strategic purchases to mitigate the impact of future tariffs and ensure high service levels during plant consolidations, partially offset by MAP improvements.

Now on Slide 11, I would like to provide some background of business that has benefited from increased collaboration and growth investments, the Industrial Coatings Group or ICG. This business recently joined our Performance Coatings Group and sells a variety of products to multiple markets, including powder and liquid coatings for metal, high-end wood finishes, protective coatings for [ pleasure ], marine and recreation and wood preservation.

Several of the markets they serve have been under pressure for the past several quarters, particularly those tied to housing. ICG organically grew revenues high single digits in the first quarter despite these challenging markets. This was achieved through investments in new salespeople and improved collaboration among its businesses which has allowed it to build on its legacy of high technical service levels and customer support.

Additionally, customer-focused innovation has accelerated, thanks to investments in collaboration at RPM's Innovation Center of Excellence, which opened in 2023. The Innovation Center also allows us to better demonstrate the high performance of ICG's products to customers. Going forward, ICG has additional collaboration opportunities with other high-performance coatings companies within RPM in PCG in areas like R&D and shared service facilities. They also continue to invest in training and development of salespeople and new products to grow share in existing markets and expand into adjacent areas.

Now I'd like to turn the call over to Rusty to cover the outlook. .

Thank you, Matt. Our second quarter outlook can be found on Slide 12. We expect another quarter of record sales and record adjusted EBIT led by systems and turnkey solutions serving construction projects with demanding specifications as well as the focus on repair and maintenance. Acquisitions will also benefit growth in the quarter. We have also taken actions to address 2 of the larger profitability headwinds we experienced in the first quarter. First, we have taken SG&A streamlining actions, including those enabled by the structural shift from 4 segments to 3.

Secondly, we have implemented pricing actions to recover the impact of inflation, including significant increases in metal packaging and niche products produced primarily in Asia, which we expect will continue to rise in the coming quarters. Overall, we expect consolidated sales and adjusted EBIT to both increase by mid-single digits in the quarter. By segment, consumer is expected to grow sales moderately more than PCG and CPG due to acquisitions.

Moving to our full year outlook on Slide 13. We expect sales to be at the high end of our previously announced low single to mid-single-digit growth range as we benefit from previous growth investments and acquired businesses. As Frank mentioned, we are continuing these investments and, in some cases, increasing them to accelerate our pivot to growth. These investments will add to SG&A for the full year and including reallocating existing SG&A spend to the highest growth opportunities. We also expect to continue benefiting from several of the self-help measures Frank discussed.

From a macro perspective, many of the trends we experienced in the first quarter particularly those related to economic uncertainty are expected to persist through the fiscal year. Taking all this into account, we anticipate adjusted EBIT will grow towards the lower end of our previously announced outlook of high single-digit to low double-digit growth. That concludes our prepared remarks, and we are now happy to answer your questions.

[Operator Instructions]

The first question comes from Michael Sison with Wells Fargo.

A great start to the year. I hope your investors have been as good as the [ Guardians ]. But Frank, just when you think about the outlook for this year and being at the lower end, how much of that was due to your investments for growth? And how much of that was maybe due to weaker demand?

So in our case, I think the investments to growth are delivering the desired outcome, higher levels of organic growth than as really being exhibited in the marketplace. I outlined in my prepared remarks about $10 million of higher year-over-year quarterly spend, $5.3 million on new hires in sales and sales associate areas, particularly at companies like Tremco Sealants, Tremco Roofing, Stonhard, the ICG businesses that Matt talked about, $2.1 million in higher M&A expense, we got a bigger pipeline. We're starting to see some better opportunities exhibited by the recent acquisitions we've completed versus what was a pretty quiet acquisition period during our MAP initiatives and $3.2 million of higher advertising mostly in consumer despite what continues to be a challenging environment there. .

And then the last area that Mike highlighted on, which was disappointing was an $8 million higher expense for health care costs in the quarter versus the prior year. So those were the the primary drivers of the lack of leverage to our bottom line, $10 million of it aside from health care costs, are very deliberate and they're having the desired outcome, and you'll see that continue. The spending that we've been doing and are doing now should serve us well in the coming quarters.

Got it. And a quick follow-up for the Consumer Group. The organic growth was down 3%. It feels like the industry is weaker. Do you have any thoughts on where you think industry demand is for the consumer group? Is it down a little bit worse? And are you picking up share? And maybe minus 3, some evidence that your business is a little bit more stable than wall paint or or the small projects? And any thoughts for kind of industry growth for Consumer Group for the rest of the year?

Sure. I do think that our consumer group is outperforming the broader industry. It's a challenging environment, and it's been that way for more than 1.5 years and those challenges continue. We're picking up share in some new categories. We've introduced a low-odor water-based spray paint, which is getting new shelf space. We're picking up share in some different accounts. And we're adding meaningfully in the cleaner category.

The Pink stuff very importantly, puts our consumer group into the consumer products categories of cleaners or historically, our cleaners have been all Rust-Oleum based and really hardware store, paint aisle type of cleaner. So we're very excited about that. It opens up new channels that we haven't served before, grocery, dollar stores, things like that, and it opens up new geographies. It's a global brand. And so notwithstanding the challenges in the North American consumer markets, we are leaning into finding opportunities for growth in other areas.

the next question comes from Mike Harrison with Seaport Research Partners.

I was hoping that maybe you could give us a little bit more detail on the increased marketing spend in the consumer segment. It sounds like -- most of that is advertising, but is there some additional promotional spend or other -- maybe other categories of marketing? And can you also get into any specific product lines that have been a focus of that additional advertising or promotional spend?

Sure. So it's been higher advertising versus the past disproportionately more social media, e-commerce as opposed to TV advertising. We have focused a larger share, as you would imagine, in the cleaners category and part of it is the Pink Stuff spend as well. And so those are the principal areas where you're seeing higher spend in the consumer area and advertising.

Right. And just to clarify there, the additional spend associated with Pink Stuff, is that just an acquisition contribution? Or are you expanding advertising beyond what Pink stuff brought just as an acquisition? .

It is both.

Got it. Okay. And then my second question is, I was hoping that you could help in understanding the impact of manufacturing inefficiencies. I don't know if there's a way to quantify that impact from plant consolidation in Q1. But I believe you called that out in Q4 as well. And I'm just curious, can you help us understand if that's increased versus Q4? And as we look at Q2, should the inefficiencies impact decline a little bit? Or could it worsen? Just helping us understand that trend, I think, would be very helpful.

Mike, it's Rusty here. To answer your question, yes, we do have 6 plant consolidations and process. So there is some duplicative costs as we transition from one facility to another. So during the first quarter, there is about $10 million of unfavorable year-over-year conversion costs and unfavorable absorption that occurred. And we would continue to experience those, we believe, in the second quarter as the consolidations continue.

I'll just add a little color to that 1 example. Tremco's previously largest North American manufacturing facility was in Toronto. 30 years ago, we were in the sticks, but as Toronto grew up, we became surrounded by residential and so really [indiscernible] forced out of there, sold that building with a 5-year window to get out. And so we are in the process of transferring that manufacturing from the Toronto facility to other parts of the U.S. And it's increasing inventory investment as we shift from Toronto to 3 other sites actually in North America. And also, as Rusty mentioned, some duplicative costs. So there's a couple of other plants like that, but that's the biggest example.

Next question comes from John McNulty with BMO Capital Markets.

So a question on the top line. The organic growth in Construction & Performance was really kind of stand out. And you gave a little bit of color on it, but can you drill down into some of the subsectors or end markets that are really driving that. And then how does the backlog look going forward for those respective businesses? Because it does seem like maybe on the guide, you're a little bit more conservative than the numbers that you just put up in those businesses.

Sure. As I mentioned, we are leaning forward very aggressively in terms of expanding sales forces and sales associates. So in construction products, some of it's along some of the product lines we've added, and Tremco Roofing continue to see a solid backlog in terms of their reroofing, institutional roofing projects. But we acquired Pure Air a couple of years ago. It took us quite a while to get certified in every state and really train up our sales force on that refurbishment of big industrial and commercial HVAC units. We're starting to see sales take off in that category.

WTI, which is our contracting, both repair and maintenance and then actually doing the whole [ supply and apply ] of major reroofing projects has grown actually faster than our material sales. It's a negative to our gross profit mix, but a positive to overall profitability and growth. So those are the areas there. In our Tremco Sealants business, our [indiscernible] and construction products are driving a one Tremco approach. So we are starting to see sales reps both in sealants and roofing benefit each other with referrals.

And then lastly, in Tremco Sealants, we are pursuing a much more aggressive approach to the entire wall. If you go back 15 years ago, we were selling gaskets and wet sealants into windows and door openings. Today, we're selling much a bigger portion of the sidewall building envelope, panelization, panelized EIFS, the ICF Nudura. And so that is helping our sales as well as we are getting a bigger share of wallet of a wall system versus those higher-end niche sealant products that were the tradition.

I'll tell you one great example of that, 10 years ago, Tremco Sealants was about 40% project based, in other words, project specifications and about a 60% traditional distribution. So basically, our sealants, Vulkem and other things being sold into commercial and industrial and some residential markets through distribution. Today, we are 60% project-based and only 40% distribution. That distribution is where the impact of pretty punky construction markets dynamics is being felt and it's being more than overcome by project specifications that we're driving today and really a flip of that project versus distribution model.

Got it. Okay. No, that's helpful. And the Performance Coatings Group, I guess, the same question because it does seem like that one, the organic growth really kind of spiked up there.

Sure. So our Stonhard business has been very aggressive in both efficiencies and hiring salespeople to drive greater sales, and it's been effective. And that's been the purest play add sales reps effectively modeled within RPM over the last couple of years. Our Industrial Coatings group is really outperforming, part of it is a couple of years of underperformance because of how much they do that touches housing, so windows, doors, cabinets, things like that. .

But traditionally, whether powder coatings, metal coatings, we have played in the small to medium-sized, low volume, high service areas. And we have been adding sales people and capabilities to start competing and winning larger accounts. For instance, this past year, it's the first time we have ever sold project to John Deere. And so we are starting to move upstream and competing effectively in some of the larger accounts, and you can see that in our numbers as well.

The next question comes from David Begleiter with Deutsche bank.

Frank, just looking at the guidance back in July versus today with the full year, what's changed to cause you to go to the lower end of that range versus your assumptions back in July?

So a couple of things. One, we continue to see challenging dynamics in the gross profit margin. We held up our gross profit margin, but some of that's mix. In Consumer, we've got a higher gross margin mix out of the Pink stuff, for instance. And so the uncertainty around tariffs remains. We knew we were going to be making and have been making these investments in growth. I think the biggest surprise to us in the quarter was the health care cost increase. That's driven by a couple of particular high-cost cases.

And also the fact in the first 6 months, we've had about a $6 million. This is 6 months now in that quarter over the last 6 months, a $6 million higher increase for coverage in a lot of these weight loss drugs. And so I would say 1/3 of that $8 million in the quarter is more permanent with these higher weight loss drug costs and 2/3 was hopefully, onetime related to some extraordinary expense. So that was the biggest challenge that we saw in the quarter.

Very helpful. And just on pricing, not the critical here, but could you raise prices earlier to account for the tariff cost increases? Or are you satisfied with the timing of these price increases?

It would have been nice to raise prices earlier. The challenge with this tariff regime is it's on again, off again. And so we had reached agreement, for instance, in consumer with some of our larger accounts on price increases, if and when the tariff impacts occurred. And so sorting through -- the impact of tariffs is a challenge for everybody. As we sit here today and it's subject to change from one week to the next, the total unmitigated impact of tariffs on RPM is about $90 million or $95 million. We have effectively offset about half of that both through production shifts and pricing and agreements with suppliers, for instance, that might share costs.

Our biggest tariff-related impacts remain in our consumer group. It's disproportionately in packaging and frustratingly in metal packaging, where it's really not the tariff impact directly, it's the domestic steel producers that have raised their price in line with the tariff regimen. So those are the big challenges. Price in the quarter was about 0.5% on a consolidated basis.

It should be somewhat higher in Q2, but inflation is likely to be higher in Q2 because we'll start to see the full impact of the tariff regime in Q2 versus where we were in Q4, Q1.

The next question comes from Patrick Cunningham with Citi.

I think you guys have had a pretty strong focus on pulling some working capital out of this business, but you noted some offset this quarter from strategic inventories purchases. What did you stack up on and why?

So we've stocked up on some of our construction products and in particular, Tremco Sealant products as we make this transition from what was previously the largest Sealants plant in North America in Toronto, 2, 3 other plants in the U.S. We have stocked up in the consumer space in some areas of new products. And in some raw material categories, and this has been true both to our benefit and to our detriment, we stocked up on some key raw materials like epoxy in front of some tariff price increases.

Understood. And then maybe just related on the price increases. How should we think about the shape of realization consumer? And is there more sort of regular structural price that you're getting across the other 2 businesses at this point?

So again, price in the quarter was less than 1%. And in Q2, I would expect it to be in the 2% range. We're getting price finally in some of our consumer groups, again, appropriately related to packaging costs, which continue to increase and we will monitor it as this tariff regime continues to be modified.

The next question comes from Josh Spector with UBS. .

This is Lucas Beaumont on for Josh. So I guess just kind of coming into the view was that [indiscernible] sort of already scaled up from a cost perspective, so that as you could get to much higher sales that would drive incremental margin uplift on those with like less cost growth on the SG&A side. So I was just wondering if you kind of think that view is sort of incorrect or just sort of where are the cost investments going now that's different and then how should we think about the volume leverage that are coming through as we move forward from here?

Sure. So first of all, historically, that's not correct. During the MAP initiatives, we were able to reduce our SG&A on a consolidated basis over the cycle, probably by 150 basis points. It was actually lower than that during COVID, but it was unsustainably low relative to no travel and a lot of cutback expenses during that time. So it's back up some, but improved from where it was when we started the MAP initiative. .

We had commented about $15 million of personnel-related expense reductions across 3 different areas. Part of it was the consolidation of our Specialty Products Group into the Performance Coatings Group and then also in consumer. We have reallocated probably half of that into sales and marketing. And so as Rusty mentioned, we have a very deliberate focus on [indiscernible] trying to drive efficiencies, continuing the efficiency drives from our MAP initiatives, particularly in G&A, as we have shrunk the number of ERPs and shrunk a number of places where we close the books from an accounting perspective every month, we have offshored some of those expenses to a shared service center in India. But we are

not putting all of those dollars on our bottom line. We are reallocating those to more salespeople, more advertising, really trying to drive best practices in e-commerce across our businesses. We tend to have our strongest teams in consumer, and we need to drive those disciplines into our industrial businesses. So there is a real pivot to growth here, which is challenging our businesses in an area of capital allocation. This is not high-level balance sheet capital allocation.

This is how are you spending your dollars in SG&A to drive growth?

Right. And then I guess just on the raw materials side, I guess, what's your sort of updated outlook there for inflation over the balance of the year. And between that and I guess, the investment in the higher cost on the SG&A side, if you could kind of just put it all together for us and tell us how you're thinking about net gross costs as [ the year ] progresses.

Sure. For the quarter, material inflation was about 1% on a consolidated basis. We anticipate it being up to about 2% to 3% in Q2, and it's disproportionately in consumer.

The next question comes from John Roberts with Mizuho.

Will there be a public new 3-year plan and should we think about an aggregate it being similar earnings impact to the MAP 2.0 plan?

So the answer to that is yes. We will probably be coming out with something public in the spring or summer of next year. As you know, we reorganized from 4-group structure to 3 groups. We announced that in July. We have some leadership changes that will be forthcoming in the next couple of months. So in conjunction with those changes and quite candidly, to wait out what's been a crazy environment of uncertainty around these tariff regimes and certainty around where broadly, things are going is difficult. We'll be in a better position to put out publicly a new 3-year plan next year. We are working internally on what we call MAP 3.0, but it's not ready for public prime time yet.

Okay. And I think you had a consumer initiative to enter the dollar stores and supermarkets. How is that going?

No, it's going well. Like Frank talked about, there's a real push to go into these adjacent categories and go into stores where we historically have not had a big presence. And with dollar stores, there's such a large footprint. So some of our companies have actually modified the packaging of their products so that they can get into those stores. And so we're seeing nice traction there. .

So [ Gap ] in particular, has come out with some smaller size [indiscernible] adhesive and repair products, had a really nice program there. And we're also seeing with the Pink Stuff opportunities to have discussions with retailers, for instance, in grocery and/or big drug store chains that traditionally we didn't have much of a relationship with.

The next question comes from Frank Mitsch with Fermium Research.

I just want to come back to DIY, suggesting that the softness and it's been an extended 2-year-plus period of softness there. What -- and you're spending some money on advertising, what are your thoughts on at least a flattening out or a rebound to take place in terms of DIY takeaway?

I appreciate the question. This pivot to growth is in anticipation of what we feel like will be some improved financial numbers as we get into the spring and summer of next year. If for no other reason, then we are annualizing 2 years of negative consumer takeaway in this space. And so you're getting down to levels, whether it's in architectural paint, which we don't play in or some of the spaces that we do that are unit volumes that are pre-COVID. And that some smart new products and I think some improvement in the housing market, which will happen with further interest rate cuts.

Remember, a housing turnover is a big driver for our consumer group. Typically, people fix up their homes before they sell it and then the new buyer turns around, redecorates it. We are in a 40-year low for housing turnover. And so both the easier comps and improving interest rate environment, we anticipate will finally result in better dynamics in the spring and summer of next year, and we are doing what we can to lean into it.

Very helpful. And just speaking more near term, we've got the month of September under our belt, how would you compare the typical August to September this year relative to what you've typically seen historically?

Sure. In the Pivot to Growth, we are accomplishing what we set out to do. And the numbers are really solid. And except for the extraordinary health care expense, I would expect our second quarter to look like our first quarter.

The next question comes from Kevin McCarthy with Vertical Research Partners.

Frank, would you elaborate on the expansion of your sales force. From my side, a few of the things I'm curious about is where in the company you're adding, if it's concentrated in any particular businesses? How many people do you plan to add, is the $5.3 million pace of expense you alluded to, likely to be steady or increase or decrease? And finally, I imagine on Day 1 it's not profitable, right, to add a salesperson, but over time, productivity increases and they cross through and become profitable. What is that amount of time? Do you have a rule of thumb there to think about?

Sure. I appreciate the question. So as an example in our Tremco Roofing business, we have new hires in their sales training program. They are essentially apprentices for year 1, they work under the tutelage of an experienced rep in year 2 and in year 3, they're on their own. By year 5, we have about a 30% turnover. And so that's the dynamic there. So we're expanding those training classes. So that's a payoff that will come, but that's been going on for the last couple of years. And so you're starting to see some benefits there. In both our Stonhard businesses and in Tremco Roofing, we are starting to add -- that's why I made it clear. It's not just salespeople, but sales support staff. .

We are adding support staff to better manage the contracts that we're taking where we apply or we have the supply and apply model. And some of our sales reps were being tied up with the dynamics of overseeing projects. And to the extent that we've been adding experienced people in project management, it frees up our good sales reps and sell more. And so those are examples of the areas where we've been adding people.

Lastly, the effort starting under [ Ronnie Hollman's ] leadership, Johnny Green, who runs our ICG, the Industrial Coatings Group was pulled together of a bunch of different relatively independent RPM businesses that did industrial or OEM metal coatings and wood finishes for wood repair products or wood preservative products. And under the ICG, they have been pulled together and are cooperating and in some cases, being coordinated more as a unit. So we can go to large accounts and deliver powder and liquid coatings in a more thoughtful, straightforward approach as opposed to having different approaches from different operating companies. So it's really been the integration of the sales approach in the ICG that's helping us. And it's well designed, it's being well executed, and you can see it in our numbers.

Appreciate all the color there. And as a follow-up, if we take into account these new investments as well as the other ones that you alluded to on the call, how would you characterize the likely increase in total company SG&A expense this year?

Well, I don't -- the $10 million that I referred to in terms of higher advertising, higher selling and higher M&A costs probably extend quarter-by-quarter, the health care costs and costs we'll see. And we need to get to the point where we can leverage this big investment into higher sales growth. Quite honestly, with a few exceptions, we're accomplishing what we need to do on the top line and bottom line in our Performance Coatings Group and Construction Products Group, and you'll see that. .

We need consumer after 2 challenging 2 years to start generating positive organic growth in the top line and bottom line. It's not unique to us. I think we're outperforming the dynamics in the marketplace, but nobody here is happy with another quarter of negative organic growth in consumer.

the next question comes from Jeff Zekauskas with JPMorgan.

Can you talk about how the Pink stuff did on a pro forma basis? And is your roofing business -- is demand for roofing accelerating or decelerating in the current environment?

So I'll let Matt address the Pink Stuff question. But on the roofing business, we're seeing higher revenue growth in roofing. Again, some of it's ancillary product areas like Pure Air, which is the refurbishment of big HVAC units the disruption and cost of getting cranes to get big air handling units off of hospitals or high-rises in downtown settings, very disruptive, very costly to put in a new unit, and we acquired this business.

We've developed it out over the last 2.5 years and a 25% or 30% of the cost of new can refurbish something that dramatically improves air quality, dramatically improves operating efficiency and extensive useful life anywhere from 5 to 10 years. And we are starting to see those revenues pick up. And so they're reflected in our Roofing division. So that's just 1 example.

Yes. And then with the Pink Stuff, we've had it for a little over a quarter as part of RPM and the integration is going as expected. We mentioned that it's been accretive to margins or M&A has been, and certainly, the Pink Stuff is a contributing factor. And like Frank talked about, we're taking the advertising that they did and inherited that. And then we're increasing our marketing in that area to grow the sales there and then also leveraging their presence in these different categories and [ sales ] where we traditionally haven't been as large.

So organizationally, we're doing one more thing, which is in the early stages. We had about a $50 million, $60 million cleaning -- collection of cleaning products within Rust-Oleum. And within our consumer group now, we have a cleaning group, which includes the Pink Stuff and those previously driven by Rust-Oleum cleaning product categories, including Mean Green and the new patented 2 container packaging that we put out.

And so we're taking a more comprehensive approach to cleaning than what we had done in the past. And in terms of growth, it's the right way to go. The broad cleaners category is $12 billion to $15 billion in the United States. It's probably larger than the serviceable addressable market in the U.S. that exists for small project [ paint and patch ] repair products, which has been our core for a long time. So we're really excited about it, but we're reorganizing internally to better be focused on that cleaning category area.

And then to go back to SG&A expense. Even if your health care costs for the quarter increased 0, your SG&A would have been up 10%. So is it an accumulation of acquisitions, spending and infrastructure. Like last year, your SG&A expense was basically flat. Why has there been such a jump? And maybe to repeat Kevin's question, like where should that grow to in 2026?

So broadly speaking, there's 3 areas that are driving SG&A higher. One is acquisitions in both the Pink stuff and Ready Seal. We have higher gross margins and higher SG&A spend, so a different P&L. So that's just a mix effect and the health care costs we talked about and then the $10 million in growth investments in the quarter, which I think is in pretty sharp contrast to peers that are cutting costs and suspending payments. And we believe it's the right thing to do to trigger organic growth in what's in a very frustrating no-growth environment for most of the manufacturing for almost 2 years. So far, it's working, and we will continue to push those levers if it keeps driving an outperformance in organic growth.

Next question comes from Aleksey Yefremov with KeyBanc Capital Markets.

Just wanted to go back to your sort of [ growth algorithm]. So let's say, this year, your guidance for mid-single-digit sales growth and then high single-digit EBIT. Should we look at this as a normal year? Or is this a year where you have these temporary challenges, investments et cetera, such that in a more normal growth or maybe high incremental margins and your EBIT would grow more than high single digit.

Sure. So I do not think of this as a normal year. I talked about the uncertainty of the tariff regime and what it's done to the cost in raw materials and its stall broadly on big capital investment decisions of our customer base. And the inflation element, it's still in the SG&A areas. You're looking at underlying inflation of compensation in the 2.5% to 3% range. So it's challenging.

In a normal environment, and I'm not sure when we'll see that 7% revenue growth should be spinning out mid-teens earnings growth. And so is the lack of leverage to the bottom line, somewhat disappointing, yes. But I think time will tell. Some of our peers are going to be putting up flat or no growth, and you're going to see flat or declining EBIT margins.

When the [ worm turns ], we want to be in a position to outperform. And it's not just strategic thinking today. I can tell you in some of our industrial businesses, going back to the early 2000s, we overcooked expense cuts coming out of the 2000, 2001 recession and took 12 or 18 months to catch up when the markets turn positive. And we want to be in a better position today, and that's how we're thinking Obviously, if we wake up in 2026 and the world is a worst place than it is today, we can take appropriate action if necessary.

And then in Consumer, are you still intending to raise prices to sort of reflect raw materials environment? Or are you fully caught [ off after what ] you're planning to do in Q2?

We have a level of price increases that were enacted at the end of Q1, which will benefit Q2 in consumer. .

Our next question comes from Arun Viswanathan with RBC Capital Markets. .

So I guess 2 questions for me. So first off, I think you mentioned a $90 million to $95 million unmitigated impact from tax tariffs. Could you just walk through that? Is that maybe 10% or 20% of your raw materials bucket that you saw elsewhere that's, say, up 30% to 50% or something? And that's how you calculate that. And then the actions you've taken, are you resourcing from other locations? Is that correct on the tariff question?

So I don't know off the top of my head, somebody will have to do the math for me in terms of the percent. But I can tell you that the 3 areas that we've had success in mitigating in some cases with certain suppliers. We have worked to understand the true cost and then we have agreed to split it, and so essentially sharing the pain. .

In certain cases, we have passed on price to our customers. And in other cases, we have shifted production. So an example of production shift. Most of the Pink Stuff paste which is their iconic cleaning product that they really were founded with, which is produced in the U.K., we have taken action to ship production of that to one of our U.S. consumer plants to serve the consumer market. Unrelated but helping us is the shift from Toronto, the Tremco Sealant plant into the U.S. although some USMCA is helping us between business in Canada and the U.S. Mexico, again, it's complicated to figure out how that works. And then we have not fully offset all of the tariff impacts, as I indicated. About half of it has been mitigated, and we are working on the other half.

Okay. And then just on the M&A front, I think you may have noted that fiscal '25 was one of your most active years, if not the most active year on that front. So I guess what are you seeing there? What's your kind of appetite to take leverage higher for the right property? And would that be mostly in PCG and CPG? Or where are you finding -- or is maybe consumer and cleaning or where are you finding opportunities?

So we've spent $600 million in the last 5 months and it's all been a consumer between Ready Seal and Pink Stuff. And again, it's been a thoughtful approach to saying, all right, where are new categories where we can drive new growth. We have done a number of smaller product lines in our Construction Products Group. They've been very strategic as it relates to the building envelope and looking at different product categories that they would like to be in that they're not.

So we have grown our market share and expansion joints for heavy industry and/or commercial. We've expanded market share in certain fireproofing and fire stopping product lines. And they've been small acquisitions but the opportunity to take a $5 million product line and turn it into a $15 million or $20 million product line with our distribution and our sales force is pretty exciting for us.

I will tell you that one of the benefits of the MAP to Growth initiative that I hope people appreciate. For a long time, we operated -- I'm talking 20-plus years with a debt-to-EBITDA ratio of 2.5% to 3%. And because of the stability of RPM still maintained an investment-grade rating, we just completed $600 million of debt-funded acquisitions and our debt to EBITDA is about 1.8%.

And so the benefits of the MAP initiative in terms of cash flow and profitability improvement -- I'm sorry, 1.8x, not 1.8%. And so the benefits of the MAP initiatives are really part of our cash flow and our credit metrics as well. And so we've got plenty of dry powder to do acquisitions. The last comment I'll make is [ PE ] seems to be not as active. They seem to be more on the sell side and they're trying to raise a new fund side as opposed to being as aggressive in the acquisition market. So we're seeing deal flow at 2 or 3 multiple turns below where it was at the peak.

This Concludes our question-and-answer session. I would like to turn the conference back over to RPM's Chairman and CEO, Frank Sullivan for any closing remarks.

Thank you. I want to conclude with a comment about what's happening societally today and in relationship to my reference to 401(k). To a certain extent, there is a battle for the soul of what drives the economy in the U.S. with a younger generation that starts to think maybe socialism is better than capitalism and that could not be further from the truth.

In fact, the American form of capitalism over the last 200 years has brought more people out of poverty in our country and the world, has generated more wealth across generations, across ethnic groups, gender, you name it and has done more to spur innovation in technology, medicine, entertainment, despite all its flaws in any other system. I mentioned that because business has to be smart. When companies defer benefit payments that are long-term investments in the stability and security of our associates retirement to meet near-term earnings per share pressure that we all have, you're feeding that narrative.

Private equity right now is working to open up $2 trillion worth of 401(k) assets to an asset class that because of its past success and its growth has average returns now that are not much better than what the broader market provides, but with a dramatically higher fee structure and liquidity, neither of which will work well in retirement plans like 401(k). And so I say that because the CEOs that matter, the Brian Moynihan, Jamie Diamonds, Jeff Bezos, Mark Zuckerberg, Doug Mcmillon need to be pounding the table in support of American capitalism. The alternative will not be good for anybody and need to provide examples of how American capitalism can create value for everybody, and we have to not feed the narrative out there that socialism might be a better model.

And I appreciate the opportunity to provide that perspective. Our second quarter will look much like our first quarter, couldn't be more proud of the RPM associates that have effectively executed on a Pivot to Growth in a continuing no-growth environment. We appreciate your time on the call today and look forward to welcoming any and all of you to the RPM Annual Meeting of Stockholders tomorrow at 1:30 Eastern Time. Thank you, and have a great day.

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

Good morning, and welcome to the RPM International Fiscal Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead.

Thank you, Gary, and welcome to RPM International's conference call for the fiscal 2025 fourth quarter and full year. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. 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 view 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 items -- 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 2024, unless otherwise indicated. We've provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentation and Webcasts section of the RPM website at www.rpminc.com.

Now I would like to turn the call over to Frank.

Thank you, Matt. I'll begin today's call with a high-level review of our fourth quarter and full year results and some additional details on our newly announced 3 segment operating structure. Then Mike Laroche will cover the financials in more detail. Matt Schlarb will provide an update on cash flow and the balance sheet. And finally, Rusty Gordon will then conclude our prepared remarks with our outlook for fiscal 2026 full year and the first quarter. As always, we'll be happy to answer your questions after our prepared remarks.

Highlights from our fourth quarter results can be found on Slide 3. Thanks to the hard work of RPM associates, we demonstrated the power of RPM, which we combine solid top line growth with improved operating efficiency that has been enabled by our MAP 2025 operating improvement initiatives. This resulted in fourth quarter sales, adjusted EBIT and adjusted EPS all at record levels. We generated positive volumes led by systems and turnkey solutions for high-performance buildings as well as our focus on maintenance and repair. The volume growth resulted in improved fixed cost leverage and allowed us to better realize the financial benefits of our MAP 2025 operating improvements. All segments increased adjusted EBIT with the largest growth coming from our Construction Products Group and Performance Coatings Group, which generated volume growth that leveraged MAP '25 benefits to the bottom line. Additionally, 3 of 4 segments generated record Q4 adjusted EBIT.

Turning to Slide 4. The record results we generated in the fourth quarter reflected a strong and consistent trend as we had delivered record adjusted EBIT in 13 of the last 14 quarters. In fact, we generated record annual sales, adjusted EBIT and adjusted EPS in each year since we began the MAP 2025 program and what can be best described as a mixed economic environment. Additionally, in fiscal 2025, we generated a record adjusted EBIT margin.

Moving to Slide 5. In addition to the consistent progress we've achieved, the cumulative impact of these improvements during MAP '25 has been significant. Compared to our baseline fiscal year of 2022, we expanded gross margins close to our 42% goal, adjusted EBIT margin by 260 basis points and improved working capital as a percent of sales by 320 basis points. These improvements in margins and working capital efficiency strengthened our cash flow and allowed us to complete the largest year of acquisition in RPM's history in fiscal 2025.

Importantly, our balance sheet remains strong with credit metrics still close to our best ever. These results are a testament to the dedication and relentless persistence of our associates, and I want to thank them for their execution of our operating improvement initiatives and commitment to RPM during this challenging low growth, no growth environment.

As we look to the future, we are focused on realizing the full power of RPM, essentially building on the efficiencies we have ingrained into our businesses and accelerating growth to take full advantage of those efficiencies. To accelerate growth, we are taking a more strategic approach to allocating capital to both organic and inorganic opportunities. This includes leveraging the progress we have made in data analytics through MAP '25 to capture true profitability so we can focus investments on the highest potential opportunities and then aggressively pursue growth in those areas. We are starting to see this take hold as we begin fiscal 2026.

As an example, we recently implemented $15 million in SG&A streamlining actions and a portion of these savings are being reallocated into our highest growth opportunities in attractive end markets like turnkey engineered solutions, cleaners and international markets in the developing world. These investments are in areas such as technical sales force expansion, marketing new products and new facility build-out.

One other key element of our growth plan that has been enabled by our MAP 2025 initiative is a cultural shift that has taken place to allow our businesses and associates to collaborate more closely or what we call connections creating value. This will drive additional organic growth opportunities and synergies in 2026 and beyond. To accelerate this shift towards realizing the full power of RPM, we've changed our operating structure to 3 segments: Construction Products Group, Performance Coatings Group and the Consumer Group, as you can see, this new structure on Slide 6.

Businesses that have previously been part of our Specialty Products Group are now reorganized under the 3 groups mentioned above. This new structure will allow us to achieve additional operational and administrative efficiencies and enable our businesses to work more closely to realize synergies in new business generation, product development and in-sourcing. For example, our Industrial Coatings group of businesses has joined the Performance Coatings Group and will benefit from improved collaboration on high-performance coatings development with our Carboline division as well as a broad distribution network, which will improve customer service levels.

The Color business has now joined the consumer group, which through in-sourcing has become DayGlo's largest customer. The new structure will allow cooperation more closely and efficiently in Color specifications, a critical component of our consumer products, in particular, Rust-Oleum. This change will also allow the Color Group to operate with a more streamlined overhead structure and leverage our consumer segment's strong marketing know-how to raise the profile of our well-known DayGlo fluorescent pigment brand.

Importantly, this will not change what has served RPM so well throughout our history, having an entrepreneurial culture that serves our customers with leading brands, products and services and staying true to our core values of operating with transparency, trust and respect. We are pleased with the fourth quarter results our associates achieved in a continuing low to no growth environment which continues to be unsettled due to the ongoing tariff uncertainty. We are optimistic about our opportunities to continue this positive momentum into and throughout fiscal 2026.

I'll now turn the call over to Mike Laroche to cover our financials for the quarter in more details.

Thanks, Frank. On Slide 7, consolidated sales increased 3.7% to a fourth quarter record led by systems and turnkey solutions for high-performance buildings, a focus on repair and maintenance solutions and acquisitions.

Q4 adjusted EBIT increased 10.1% to a record as volume growth allowed us to better leverage MAP 2025 initiatives and overcome headwinds from temporary cost inefficiencies from plant consolidations and raw material inflation, which was driven by metal packaging. Profitability headwinds included higher M&A expenses, higher variable compensation associated with the sale of Technical Products and the SG&A from acquired businesses, partially offset by SG&A streamlining actions. Fourth quarter adjusted EPS was also a record driven by the improved adjusted EBIT.

Turning next to geographic results on Slide 8. Growth was led by Europe, were growth in Performance Coatings and M&A benefited sales. In North America, sales growth was driven by system and turnkey solutions serving high-performance buildings. Emerging market sales were mixed as Latin America grew, excluding FX, Africa and Middle East grew modestly in addition to solid prior year sales and Asia decline as economic conditions in the region remain soft.

Next, moving to the segments on Slide 9. Construction Products Group sales increased to a record driven by systems and turnkey roofing solutions survey high-performance buildings. This was in addition to strong prior year results. MAP 2025 and higher sales of Engineered Systems and services that expanded margins drove record adjusted EBIT. This was partially offset by temporary inefficiencies from plant consolidations.

On Slide 10, Performance Coatings Group achieved record sales, led by turnkey flooring solutions serving high-performance buildings, fiberglass reinforced plastic structure growth and M&A. Adjusted EBIT was a record as higher volumes improved fixed cost leverage, which was aided by MAP 2025 and as a result of sales mix improvement.

Moving to Slide 11. Specialty Products Group sales improved as specialty OEM showed signs of stabilization after a cyclical downturn. Food coatings continued to perform well and was aided by a prior acquisition. Demand was soft in the fluorescent pigments and disaster restoration businesses. Adjusted EBIT increased thanks to MAP 2025 benefits, partially offset by a $2.5 million bad debt expense due to a customer bankruptcy, and higher start-up expenses at a resin center of excellence.

On Slide 12, the Consumer Group sales declined modestly as new product introductions and 1 month of the Pink Stuff acquisition were more than offset by continued DIY softness. We also continued rationalizing SKUs, which had a negative impact on sales, but helped improve the adjusted EBIT margin. Adjusted EBIT increased to a record driven by MAP 2025 benefits, which more than offset the sales decline and raw material inflation.

Now I'll turn the call over to Matt who will cover the balance sheet and cash flow.

Thank you, Mike. Our strong cash flow in fiscal 2025 that was enabled by MAP 2025 profitability and working capital improvements allowed us to continue returning cash to shareholders in the form of dividends and share repurchases. Overall, these increased $39 million or 13.5% over the prior year.

Operating cash flow for fiscal 2025 was $768.2 million, the second highest amount in the company's history, surpassed only by the prior year when there was a large working capital release when supply chains normalized. During fiscal 2025 fourth quarter, inventories increased as we made strategic purchases of raw materials to mitigate the impact of future tariffs. The strong cash flow also contributed to the funding of several acquisitions in fiscal 2025, which is the largest M&A year in RPM's history. This momentum has continued in the new year with the acquisition of Ready Seal, a leader in high-quality and easy-to-use exterior wood stains during the first month of fiscal 2026.

Debt increased by $519.5 million year-over-year, primarily driven by the funding of TMPC and the Pink Stuff acquisitions. Despite this debt increase, our leverage ratio is near all-time best levels and liquidity remained strong at $969.1 million.

CapEx increased $15.9 million over the prior year as we invested in growth projects, including the Resident Center of Excellence and a distribution center, both of those facilities being in Belgium and a new production of research facility in India. The consolidation of 8 plants through our MAP 2025 program also contributed to the higher CapEx.

Now I'd like to turn the call over to Rusty to cover the outlook.

Thank you, Matt. Moving to our full year outlook on Slide 14. We expect another year of record sales and adjusted EBIT in 2026 including margin expansion as we benefit from MAP 2025 carryovers as well as from recent acquisitions. We expect sales to increase low to mid-single digits and adjusted EBIT to grow in the high single to low double-digit range. We will leverage the things within our control, including implementing additional efficiency initiatives and focusing on turnkey and system solutions for high-performance buildings.

Our new 3-segment organizational structure will contribute to improved collaboration and SG&A streamlining. Overall, SG&A streamlining actions completed throughout the first quarter will save around $15 million on an annualized basis with most of the benefit coming in future quarters. Approximately 1/3 of these savings will be reallocated into higher-growth business platforms for technical sales force expansions and increased marketing activities.

Additionally, we are in the process of consolidating 8 less efficient plants while opening 3 plants in fast-growing international markets that will be shared by multiple RPM businesses. We expect higher pricing in response to inflation, particularly the tariff-related inflation that we are unable to otherwise mitigate. We will also benefit from the businesses we have recently acquired.

Interest rates are an important variable that we will be watching. They have remained elevated which has pressured existing home sales and DIY activities and have also been a headwind to some new build nonresidential construction. Higher debt balances from M&A will also contribute to increased net interest expense, which is expected to range between $105 million and $115 million for the year.

Our first quarter outlook can be found on Slide 15. We expect sales growth and record adjusted EBITDA in the quarter led by systems and turnkey solutions serving high-performance buildings as well as a focus on repair and maintenance, which customers tend to gravitate toward during times of economic uncertainty. Additionally, we will benefit from a full quarter of the Pink Stuff acquisition and the Ready Seal acquisition, which closed a couple of weeks into the first quarter.

We also expect inflation to continue increasing in the quarter, particularly in metal packaging, which has been rising in response to tariffs. This will temporarily cause price cost to be negative during the quarter as not all price increases were fully implemented at the beginning of the quarter. These profitability headwinds are expected to offset operational efficiency benefits during the quarter. Overall, we expect consolidated sales and adjusted EBIT to both increase by low to mid-single digits in the quarter. By segment, we anticipate similar sales growth among the 3 groups with consumers slightly higher because of their acquisitions of the Pink Stuff and Ready Seal.

That concludes our prepared remarks, and we are now happy to answer your questions.

[Operator Instructions] Our first question today is from Mike Sison with Wells Fargo.

Really nice quarter and outlook. Frank, I'm just curious in terms of what underlying demand or organic growth do you see this year? I know you have some acquisitions within your outlook for low single-digit growth in sales. But just a little bit of color what you think the organic growth can be in this difficult environment?

Sure. Broadly speaking, and you've heard this on some of our more recent investor calls as we were approaching the end of our MAP '25 initiative, which formally ended at May 31, 2025, we've been talking within RPM about a pivot to growth, and we're starting to see that take hold.

I think we anticipate the ability to consistently generate 2 to 3 points of organic growth on a consolidated basis for the year. I think the 2 biggest challenges that are kind of the dynamic factors as to whether things could be better. Our certainty and finality around the tariff issues or not and the worm turning for the consumer DIY business, which is see 24 months of no or negative growth on a pretty regular basis and something extraordinary in our history. But you're seeing really solid organic growth out of CPG and PCG, and we're starting to see things move in the right direction after a challenging 18 months in the Industrial Coatings group, so more OEM coatings that was the largest piece of our Specialty Products group. I think those are the key factors that give us confidence that we're going to see modest organic growth quarter-by-quarter for the year.

Great. And a quick follow-up. The new 3 segment structure, does that enable you to generate more productivity, cost savings down the road? And how do you think about that with the new segments?

Absolutely. So at the start of our MAP initiatives 7 years ago, so in the fall of '18, our Specialty Products Group was about 11% of consolidated revenues and somewhere in the 18% or 19% of consolidated EBIT. They -- through economic challenges and some underperformance in a few units shrunk to this past year where they're slightly less than 10% in each case. And so we saw that in conjunction with the retirement of the Group President, Ronnie Holman, who's been with us for more than 3 decades, to consolidate those specialty products group businesses into the other parts of RPM will benefit from upfront about $15 million of expense reduction or efficiency actions taken in Q1 will benefit from the synergies both operationally internally and externally. I mentioned in my prepared remarks, the opportunities to coordinate better the activities of our Industrial Coatings group with Carboline, which will now both be part of the Performance Coatings Group.

We think that not only is are things improving in our Color group. But on a $100 million business, their largest single customer is $8 million of sales to Rust-Oleum. Rust-Oleum is in the Color business. And so it's a combination that we think will move our Color business and our DayGlo business forward better than had it continued to operate as an independent company. So those are just some examples of the synergies we see, both on the cost side as well as on the revenue side.

The next question is from John McNulty with BMO Capital Markets.

Congratulations. Frank, great results. I guess I had 2 questions. One is on the MAP '25 program, and I know it sounds like there may be a new one coming soon. But I guess can you help us to understand how much in terms of incremental savings in 2026, you may be expecting just so we can kind of have a good baseline to work with?

And then the other question is just you made some pretty significant improvements on the working capital front in the MAP '25 program. I guess how much of that do you feel like you still have left to go? Because I think in the prior couple of quarters, you were at least implying that there's still some pretty heavy lifting going on there. So can you help us to think about both of those?

Sure. I'll give you a couple of data points, which really highlight why we feel -- we'll have a choppy first quarter in terms of poor leverage because of the cost price mix dynamic that we're facing, but a combination of price increases in a number of our businesses and product lines that are rolling out at the end of July and into August and early September will help.

Specific to your question, the MAP 2025 benefits in fiscal '26 should be about $70 million across the full year. And then I think the last area will be the benefit of the one expense reduction actions associated with the consolidation from 4 segments to 3, which will start benefiting from in the future quarters. So those are the key elements in terms of how we think about it.

Relative to working capital, there's still a 200 or 300 basis point improvement that we expect. You will see forward progress in fiscal '26, whether or not we get all of that in '26 or it bleeds into '27, time will tell, but we will make forward progress this year, and our goals, which we intend to meet are to gain another 200 or 300 basis points of improvement.

Got it. Okay. No, that's great. And then just as a follow-up, it seems like the dams kind of opened up a little bit with regard to M&A. I guess, can you help us to think about the M&A pipeline as you're looking out to 2026 at this point? I know you've completed a bunch, but you still [ Middle East ], you still have a really strong balance sheet and more cash flow to come in. So how should we be thinking about that?

Sure. I'll tell you that both culturally, but also in terms of metrics, the benefits of the MAP initiatives that our people have executed over the last 7 years through an improved EBITDA margin, which is a ratio that the rating agencies that banks look at and a sustainably improved cash flow, including Ready Seal and the Pink Stuff and TMPC in the last 12 months, we've completed over $600 million of debt-funded acquisitions. A decade ago, that would have challenged our balance sheet a little bit. Today, it modestly moves those ratios.

And so we've got plenty of dry powder. We're also seeing in these transactions, and it happened later than you would have expected. But we went through a period of incremental debt cost of capital for big companies of almost 0 to a period where the cost of capital even on an incremental basis is in the 5% or 6% range. And you would have expected that to bring down M&A valuations, it has. It took longer than maybe you would have expected.

But the transactions that we're being successful on today are at historically high multiples for us, but 2 or 3 multiple turns below where transactions were happening maybe 2 or 3 years ago. And we're in a good position to take advantage of that. And I would expect our traditional acquisition growth machine to deliver more revenue growth and more deals this year and in subsequent years.

Congratulations on the quarter.

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

Congrats on the results and particularly nice to see the strength in construction products against the current macro backdrop. On Slide 7 and 8, you talk a little bit or reference at least your success in systems and turnkey solutions. So just wondering if you could frame that out a little bit in terms of maybe the size of what you're doing there, the growth rates? And my impression is you were a first mover in that regard. And I'm curious as to whether any of your competitors are adopting that sort of turnkey model or whether you have a lot of runway in terms of first mover advantage there?

Sure. I can't really speak to competitors, but I can tell you that we have had in our Construction Products Group, a very deliberate effort over the last, let's say, 5 years maybe even a little bit longer, but it's really starting to take hold in the last year or 2 of moving from selling components to selling systems. And so with the advent -- so drive it was its own business a decade ago, selling exterior finishes and EPS. Tremco sealants sold their sealants into construction projects via distribution and through specifications. Today, they're really focused on 6 sides of the building through acquisition and internal development. .

We've acquired things like Nudura, so ICF panelization. And so when you think of a wall system a decade ago, we were providing all of the high-margin sealants, gaskets, the elements around window, door penetrations, roof connections to walls. Today, we have a much larger share of that wall. We have high-performance building solutions in Nudura. We have opportunities now to be more of an asset maintainer with some of our big customers instead of just doing reroofing or owning roofing. We now have Pure Air, which allows us to address maintenance and rehabilitation of big HVAC units, which we've been asked for decades by customers, "Hey, well, you're on a roof, can you fix this?" We didn't have a very good answer. We do now with Pure Air.

So we've really been thinking about both asset management and what that means and system solutions and how we own a bigger piece of the wall, not just the sealant or gasket or unique components. So that's been one critical area. I think the other critical area in our Stonhard flooring business, in particular, in Tremco Roofing is we've had for decades, a unique supply and apply model and in a labor challenged environment, that gives us an advantage in some circumstances, and we're seeing those benefits as well.

The last comment in this area and it highlights some of the outperformance of our Performance Coatings Group and our Construction Products Group, they have essentially teamed up in a what we call a platform approach to the developing world. 5 years ago, we did a full-blown analysis with our Board on acquisitions. And the one area that stood out is not being successful was what we deemed small and far away, a strategy of planting a flag you name it in Indonesia, in Dubai, in Poland wherever in different places. And we really weren't following up.

So we had these small operations, but there wasn't a lot of synergy and attention paid to them. We have reorganized the developing world approach under 1 leadership team. They get the same attention as each of our groups in terms of monthly performance and outlook. And so I think we have a strategy to grow in the developing world, particularly across our industrial and commercial product lines that's starting to come to fruition that quite handily 5 years ago wasn't working. So you put all of those together, and I think it explains the outperformance in our CPG and PCG businesses and why we think that, that's going to continue.

Very interesting. My second question is for Rusty. Would you comment on what the passage of the 1 beautiful Bill Act means for RPM? For example, do you anticipate lower cash taxes given the provisions related to accelerated depreciation and R&D expensing?

Sure. Yes. We are still sorting through that, Kevin. In general, it's good news that the corporate tax rate is not going to 28%, which was proposed in the last administration. Also, you mentioned bonus depreciation. Yes, that should spur investment, and that would be great, as you can imagine, for RPM. Manufacturing, of course, is one of many sectors of construction that we service.

And in terms of what I understand is that, yes, from a tax perspective, it is looking like that the depreciation on our $220 million a year of capital spending can be basically, we can expense the purchase of tangible property at 100%, not 40%, which was the case prior to January. So nothing but good news, but still a lot to sort through.

The next question is from Patrick Cunningham with Citi.

Can we maybe unpack the sort of price cost, particularly in 1Q and then expectations for the balance of the year? And are the biggest pricing opportunities more in these turnkey systems where you're seeing strong demand and have the value proposition? Or is there anything more broad-based there?

I think broadly, we look at pricing and have better discipline through our MAP initiatives across all our businesses. Specific to Q1, our big challenge is in consumer. There's a couple of commodity chemicals that are actually showing deflation. One exception, which hurts our industrial businesses is epoxy resins, which we're a huge buyer of. Those were up low double digits.

But specifically to consumer, metal packaging is a real challenge. Plastic packaging is up modestly, pigments are up double digits, propellents are up 13% or 14%. And so when you look at our Rust-Oleum business in particular, between metal packaging and propellants, it's a real challenge. And they're managing on the operating side to find efficiencies, but we're going to need some price there and have plans to get it at the end of the summer and early fall. So that explains kind of the challenge in Q1, where I would expect us to demonstrate like we did in Q4, real solid growth, positive organic growth in our industrial and commercial businesses, but a lack of leverage because of some of the segment consolidation activities that are driving some costs, some of the MAP initiatives that are driving some duplicate costs as, for instance, we're closing a major Tremco plant and in the process of moving all that production into 2 plants in the United States. We have some similar activities in Europe, which cannot be adjusted out. And then I think those are the key elements of what will drive a lack of leverage in Q1. But as I said earlier, expense reduction actions in Q1 in relationship to the segment consolidation price increases that are scheduled here for the end of July into August and early September. And then broadly, the benefits of MAP 25 on the rest of fiscal '26 will show some nice leverage to the bottom line of the growth that we put forward in the quarters after Q1.

Great. Very helpful. And then in the prepared remarks, you talked about potential headwinds to nonresi construction. Can you speak to the health of the project backlogs and Construction and Performance Coatings. Are you starting to see any commitment slow or maybe delays impacting the conversion of the existing backlog?

No. The backlogs for those businesses are really strong. The challenges that we'll face are just difficult comps. Both PCG and CPG had really strong years in fiscal '25, really strong years in fiscal '24. So it's -- we're rounding some more challenging comps. But as you saw in Q4, we're generating some pretty solid low single digit, mid-single-digit organic growth, and a lot of it is around the systems, a lot of it's around the advantage of the supply and apply model and we expect that to continue.

The other thing that they were working at is in our consumer DIY business. We have been introducing in our DAP business, in our Rust-Oleum business, new products there's a low older product -- water-based load or product just introduced at Rust-Oleum. There are some new single component foams that were introduced in the past 6 or 9 months adapt, the move into cleaners with the Pink Stuff really puts us on the map where previously, we had somewhere in the $50 million to $70 million range of kind of niche cleaning products. Now we'll have north of $250 million in the cleaning category.

And importantly, the Pink Stuff gets us into channels that we didn't have much of a presence in. Grocery, discount, drug, and so these are thousands of outlets where the Pink Stuff is a broad cleaning category versus the niches we had in the crud cutters and the Concrobiums. And so a very deliberate strategy to diversify into new channels and into a new cleaning category with some of the disciplines our consumer group has. And hopefully, that will begin to pay off in fiscal '26 despite the lack of housing turnover and its impact on DIY markets, which is not really -- which has been bad for the last couple of years.

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

Congrats on a nice quarter and pretty good looking guidance. I was hoping that you could maybe help us take a step backwards and just help us understand, in the fourth quarter, you guys were pretty meaningfully ahead of your expectations. I was hoping you could walk through what areas specifically were better than you anticipated? Where do you feel like you were right to be more cautious? And can you help us understand how demand trends in some of your key segments or product lines were playing out in April into May, into June, I think your press release referred to some momentum on the outlook. And I'm just curious what specific areas you guys are seeing this momentum?

Sure. So a couple of things. One is new products in consumer that I mentioned, a lot of which were introduced this spring, and so that's starting to take hold, and it's helping us fight an otherwise broad economic challenge in that area. Another one is what we're doing in the developing markets, we're seeing double-digit growth and EBIT margin improvement that's meaningful in local currencies. Currencies didn't help us last year. It looks like currencies might actually be a tailwind in fiscal '26. So that's good news.

And then I will tell you that if you see the detail in our press release on PCG and CPG, as I indicated earlier, I think we can generate a solid 2 or 3 points of real unit volume growth. We had better than that Q4, some of that was weather-related delays from the Q3, which we had talked about in Q3. And thankfully, the great momentum that we built from Q1, Q2, and through Q4 that we continue to see back to your question, as we get into '26, Q3 was really an odd winter interruption.

Our fiscal year-end helps us in some ways it hurts us. In this case, the calendar didn't help. Our Q3 was December, January, February, and the weather was terrible. And our Q3 been a January, February, March on a calendar quarter like most of our peers, our results would have been better. And so I think it's a combination of those things that explain the strong fourth quarter, but the continuing momentum, if you really think if Q3 is an aberration, we're showing momentum from Q1, Q2, Q4, and we see that continuing as we enter fiscal '26.

All right. Very helpful. And then I'm just curious, in terms of the inflation that you're seeing, would you categorize that as being normal supply and demand fluctuations? Or do you think it's driven more by tariff impacts? I think we're just trying to get a sense of whether we could still expect some further changes in what you're seeing around input costs depending on what happens with trade policy?

Sure. Our best guess -- and we look at it pretty in great detail of the unmitigated impact of tariffs as they stand today, and of course, this can all change next week or next month. But our best guess today is a negative 4% to 5% hit in fiscal '26. We have some mitigation activities in terms of agreements with vendors. We have some opportunities, as we talked about, for instance, the Pink Stuff moving production for the pace that they sell in the U.S. to adapt plant. So we're working on that. That's just one example. And then the final area would be in price increases.

From an inflation perspective, I would tell you that this is a rough guess, and this is Frank Sullivan, but I think half to 2/3 is truly tariffs and half to 1/3 is the response of domestic suppliers taking advantage of the tariff redeems to raise prices. Steel is a great example. Tinplate does come a lot from overseas, not a lot of production in the U.S. but the aggressive pricing of steel companies because they can is a challenge for anybody to buy steel these days.

All right. If I could sneak one more in. Just curious if you can give any guidance on depreciation and amortization for fiscal '26 as well as the CapEx outlook?

Sure, Mike. Yes. So depreciation and amortization, it should be around $200 million for fiscal year '26. The increase is really driven by the M&A we've done and also some of the higher CapEx spending we've had. And then when we look at CapEx for the full year should be about $220 million to $240 million, that would be the range. And just also, we mentioned this on the call, but just to reiterate, interest expense will be higher this year because of the additional debt that's been used to fund these M&A. So we expect net interest expense to be between $105 million and $115 million for the year.

The next question is from Matthew [indiscernible] with Bank of America.

I'm not sure I've ever heard that last name pronunciation, I like to own. But congratulations, I guess, it was a good quarter and obviously, some of this organic growth. I wanted to touch a little bit on the flooring side of the equation. I mean, some of this is reflective of the data center AI build-out, is that manifesting into critical mass here? Or is this still an opportunity to come as it relates to like track?

Yes, I think there's still more opportunities there. We are seeing some benefits in certain areas, in particular, our fiber grade business and FRP grading, and its nonconductive nature in data centers. We're seeing some in flooring and coatings. I would say we're getting our share. I would not say yet we're getting more than our share, and we're working on that. And -- but in general, we're just seeing a nice uptick in small to medium-sized foreign projects along with some of the larger, more headline projects that are out there. And some of it's a really focused sales force, and I do believe some of it is our supply and apply model which in a challenging labor environment is helping us.

I appreciate that. And I think by our estimate, we have something like $230 million in top line contribution to deals next year. Is that right? And what do you expect EBITDA contribution from that? And kind of related SG&A was up because of some of this deal -- some of the deal activity. Is that mostly just onetime legal banker fees with the streamlining, how should we expect SG&A to kind of flow through the year?

Sure. Yes, I can take that one. In terms of acquisitions, we've announced the Pink Stuff acquired at the beginning of May and annualized, that's GBP 150 million pounds, and then we just acquired Ready Seal in the middle of June. We disclosed that at USD 40 million. So you can model those in. And you're right, Matthew, on acquisition, deal costs, they were elevated in Q4, and they'll continue to be elevated in Q1. As Frank indicated on the last call, that's actually a favorable indicator for RPM when those costs are up activity is robust, and we would expect that to hopefully continue.

The next question is from Josh Spector with UBS. .

Just a couple of quick follow-ups. First, on raw materials, I apologize if I missed this, but previously, you said mid-single-digit inflation is where you thought we'd get to. What's your latest view there?

Yes. In general, I think as we start the year, we're seeing broadly on a consolidated basis, inflation in the 1% to 2% range. But it's kind of heavily weighted towards what's happening in our consumer business around packaging, propellants and some pigments. And I'm hopeful that as this tariff issue gets some certainty and settle down, that we'll see that. Simplify, as I indicated earlier, unmitigated, we see a 4% to 5% impact of the tariff regimes and our ability to offset some of that through moving manufacturing and/or agreements with some of our suppliers will help, and it would be nice to get through after this year and have some of that VUCA uncertain volatile changing every week provide some certainty in which people can plan around. And as Rusty mentioned, that and some of the positive impacts of the one big bill on manufacturing investment I think we'll get people off the sidelines in terms of making decisions on additional projects, which will help us.

Okay. I guess what I was trying to figure out is, so does that 1% to 2% inflation peak relevant? Or is that the mitigated impact? Or do you expect that to increase as we go through the year?

The 1% to 2% inflation is what we are seeing in Q1, and it's disproportionately weighted towards consumer.

The next question is from David Begleiter with Deutsche Bank. .

Frank, just on in Consumer, the organic down 3.8% in the quarter, how much was due to the SKU rationalization? If you remain, are you seeing greater pressure on the consumer as we speak? Or is it pretty much the same?

It's pretty much the same. We just finished our second year or 8 quarters in a row of no or negative DIY takeaway, and we've never seen anything like that. It's unprecedented. And it seems to be flat lining, if you will, but there's no real dynamic here. We're at a 40-year low in housing turnover and certainly others have lamented that and that's a challenge in this area. It's predominantly in our Rust-Oleum business, and small project paints in part because of their size and their market share.

DAP continues to build momentum and show some positive momentum throughout '25 and as we get into '26, they have more of a contractor customer base than our Australian business does. We're actually performing pretty well in the European marketplace. However, in Europe, we are in the process of discontinuing a lower-margin product line and closing a factory there. And so that was part of the negative impact. On an annualized basis, the SPS business was $50 million, and most of that will go away, and we're in the process of transitioning that into other plants and then we are looking to sell the facility.

Got it. And just back on raws. On Tuesday, one of your Cleveland-based peers lowered the back half raw material guidance. They're seeing reductions in solvents and resins. Why they disconnect with what you're seeing? Or is it just more packaging-related costs? Or maybe you can help us there.

Sure. So to the last question, which I was really trying to get at the same thing in terms of where we see inflation going. I don't know. All I can tell you is that in Q1, our inflation on a consolidated basis, it's going to be 1% to 2%. And it's mostly in consumer. And it is -- so metal packaging, as we sit here today, is up 11% or 12%. Propellants up 13% or 14%, plastic packaging is up 1% or 2%, pigments are up 10%. Those are -- there are some solvent areas that are going down. The one exception, which is a meaningful raw material for RPM across the board is epoxy. So we're big producers of epoxy floor coatings, epoxy coatings, epoxy sealants. And so that's up about 11%.

Certain solvents and other things are moving in the right direction. If oil prices move in the right direction, that will be good. But given the impact that tariffs have and the uncertainty from one way to the next other than being able to forecast a 1% to 2% inflation and give you the details we just did, we don't really have a clue as to where things are going post this fall and into next year.

The next question is from John Roberts with Mizuho.

And I'll add Mike, congrats. Is there a home for all of SPG in the other 3 segments?

Yes. So if you look at the Color Group, roughly $100 million, $8 million of that is intercompany sales from our Color Group to Rust-Oleum and the Color Group is about Color and Rust-Oleum is about Color. It's a great fit, and there's opportunities with our best consumer marketers to do things with DayGlo brand that up until now, we have not. .

Our Legend Brands business is really asset management. And as we get into businesses like Pure Air which is the refurbishment and rehabilitation of major rooftop HVAC units. It really fits into that same thing, that's about $100 million. And then the balance of the $700 million SPG prior segment is the industrial coatings business and the food business.

The food business, the food coatings business, not a lot of synergies. It's just a great business, higher than RPM margin profile at the gross margin and EBIT margin level, good solid growth. It had to go somewhere. So it's gone to the Performance Coatings Group. But the other 3 elements all have really good strategic fits.

And then you had a customer bankruptcy in SPG last quarter and prior, you had a bankruptcy in the consumer segment. I know you said the backlog is relatively strong, but are you seeing signs of stress across other areas of your customers?

Not that we're aware of today. The dynamics in the air handling, air moving rehabilitation Legend Brands business, are changing, and it's moving a little bit from distribution to direct sales. And so there's a lot of dynamics along the lines of what you're asking. That's about $100 million business for us. Other than that, we don't see any signs of stress from our customer base or any expectations of further bankruptcies. .

The next question is from Frank Mitsch with Fermium Research.

I'd love to get invited to one of the local Cleveland business meetings where you get together with some of the steel guys. I'm sure it's a very light environment. I wanted to follow up on the MAP savings for fiscal 2026 and confirm the $70 million that you referenced that from MAP would go into '26, that's an incremental number, correct?

That's correct. So we formally concluded the MAP '25 program at May 31, but there were activities throughout fiscal '25 and turning some plant closures and some other activities on operating efficiencies within our plants that will benefit and including some plant closures that are in process but not completed in fiscal '26, that will positively impact this new fiscal year. And that $70 million is incremental. That's correct.

All right. Terrific. So if I basically add that to fiscal '25, assuming that's incremental, then you're basically at the low end of the guide for the full year. So hopefully, we have a better economic environment to get to the high end and beyond. And then on Europe...

Let me just address that, Frank. Not just doesn't flow to the bottom line. The inflation that we haven't talked about is on the nonmaterial side. Wages are up and salaries were up about 3.5%, 4%. We're seeing huge increases in insurance costs and in medical costs. So there's a lot of moving parts in any business and certain a lot of moving parts at RPM, but you got to offset a portion of that $70 million with a wage salary increase in the 3.5% to 4% health care costs and insurance costs that I mentioned. So there are tens of millions of dollars of rising cost across our business that are not associated with raw materials that we're also managing.

That's a good qualifier. I appreciate it. And then lastly, Europe, obviously, very impressive performance, part of that M&A related. Can you talk about the -- how much of that 15% was coming from M&A? And how sustainable is that improvement in Europe? Have you seen the bottom there and how is the outlook, please?

Sure. Most of the growth was M&A. We're seeing a nice improvement in profitability through bringing the MAP initiatives maybe later than where we started in North America to Europe. Dave Dennsteadt, who was President of our Performance Coatings Group, moving his family to Europe a couple of years ago to oversee and drive a lot of these operating improvement initiatives.

So on a core basis, our revenues have been relatively flat. Most of that fourth quarter pickup was M&A. A big chunk of that is the Pink Stuff, which is a disproportionate chunk of its business in Europe, U.K. and Europe. But the margin profile there is improving and the cash flow there is improving, and there's more to come on that.

Next question is from Vincent Andrews with Morgan Stanley.

Most of my questions have been answered. So I'm just going to look for some clarification on something that I'm hearing different points of view on in the investment community, which is, is there going to be a formal MAP 3.0 program? And if so, when do you think you'll introduce it to us? And I think from your prior comments, it seems like if so, it will be much more of a revenue-oriented or growth-oriented program from a revenue perspective rather than a lot more on the cost side of the equation. So any thoughts on that would be helpful.

Sure. The answer is yes. There will be a new program, what we call it, it's still up for debate. I think given the uncertainty around tariffs and the stop starts change next week, and the decision that we came to over the last 6 months or so to think about, all right, what's the right structure going forward and this move from 4 segments to 3 segments. I think all those are dynamics that we want to get settled. And so I would expect a new MAP program probably to be unveiled in the spring or summer of next year, but we are absolutely working on a, continuing the operating efficiencies that we gained through MAP, we've got 200 or 300 basis points, as I mentioned earlier, of additional improvement in the pipeline on working capital, which will enhance cash flow. And we fully intend to implement a new 3-year plan. And then at some point in the next, call it, 6 to 9 months, figure out what the appropriate communication on that is externally.

The next question is from Ghansham Panjabi with Baird.

I'm sorry if I missed this if you already said this already, but what are you embedding for consumer volumes for fiscal year '26. And how should we think about the sequencing of that in context of -- it doesn't sound like there's much improvement, but you have some -- from an underlying market standpoint, where you have some new products, et cetera?

I think that's right. Rusty can comment on some of the outlook we provided by segment. But we're introducing new products. We're focusing on cleaning is an entirely new category, along with our small project paints and spray paints, cox and sealants, abrasives. So we've got -- we're broadening the breadth of the product categories that we're involved in very deliberately introducing new products. And I think when you look at our performance versus our performance by itself has been flat to down for 8 quarters in a row in terms of volume, not a happy thing. But to their credit, we have performed at or better than many of our peers in terms of what's been a very difficult environment.

Yes, that's right. I would say that if you look at the outlook for Depot and Lowe's and the performance of our biggest competitors at those 2 accounts, I think our results hold up pretty well. We are not expecting a lot of growth. But like Frank says, we try to outrun it with innovation and bringing new products and new platforms to the retailers.

And so one last comment I'd make there is that Pink Stuff is a real dynamic brand. It gets us into new channels, but there's things in cooperation with Rust-Oleum that we could do to accelerate the U.S. growth of that brand. Ready Seal, great business, great franchise in partnership with Rust-Oleum, things that we can do to accelerate organic growth of that acquired business beyond what they could do on their own. And so acquisitions will also play into improved results for our consumer segment.

Got it. And just one final one. Obviously, your guidance for fiscal year '26, sales low to mid-single digits and then significant operating leverage on EBIT, almost 2x that. Is that a function of your confidence that the volume outlook is better for the company, perhaps versus your thoughts coming into fiscal year '25? Or is it on the cost side that you have a lot of confidence on or both? How would you even think about that?

Sure. It's a -- mostly a function of our efforts throughout fiscal '25, mostly internally, although I referenced this on a couple of our calls to pivot to growth. We've spent 7 years not only executing the MAP initiatives, consolidating production, bringing lean manufacturing disciplines on an effective and sustainable basis into operations, working on what was an obvious opportunity to improve cash flow with better working capital performance.

But the cultural shift that we've made to greater collaboration and to a leadership level that thinks as much about RPM as they do their individual businesses and then really a pivot growth to really focus on how can we allocate more dollars to what's working and be a little more deliberate that way. We just believe that we'll be able to generate a year of organic growth in the 2% to 3% range, complemented by acquisition activity, complemented at least in the first part of the year by some additional price. And as we start the year, some favorable FX. So there's a lot of things that are lining up as we sit here today.

I would just caveat that with the 2 dynamics I mentioned earlier. Certainly, finality around this tariff issue seems to be in sight, who knows. And so if that gets worse and set of better, that could temper all of this. And at some point, the worm is going to turn for the consumer DIY because while we're looking at M&A and while introducing new products, the negative performance in the DIY markets broadly existed for almost 8 quarters, and we've never seen that before. And eventually, the broader economic dynamics there, I think, will improve, couldn't tell you when. But when it does happen, we'll be ready.

The next question is from Jeff Zekauskas with JPMorgan.

You expect your EBIT to grow roughly 10% next year. Do you think of that as about half from acquisition benefits and half from organic and other factors?

I'm not sure I would cut it that. I can tell you from a revenue perspective, it will be about half acquisition and half organic growth. And so I suppose that you could think of EBIT growing that way. As we get into quarter by quarter, it will really be a balance of how those acquisitions grow, what we can do with them, but also how organic growth leverages to our bottom line. If we get to the high end of our range, it's because we will be generating better unit volume growth than we anticipate. And if that happens, you'll see a nice leverage from our core operations.

Okay. And then in the quarter, your cost of goods sold went up a little bit less than 2%, and your revenues went up I don't know, 3.7%. So cost of goods sold rose less than revenues. And really a lot of your revenue growth was acquisitions and organic volume. And you talked about raw materials being higher cost inflation for employees being higher. How do you achieve the lower rate of cost of goods sales growth? And did you say how much the MAP initiative helped for this year?

Sure. Yes, we -- in terms of the MAP initiatives, we've been running roughly throughout the program at about $100 million a year run rate for incremental MAP initiatives. And Jeff, what was your question on...

Well, Rusty is looking at that in the MAP initiatives, you're looking at meaningfully improved conversion costs, both from consolidating production and closing plants as well as introducing lean manufacturing disciplines that are driving a higher level of throughput. And so all those have been meaningful in terms of our gross margin improvement. Some of it, Jeff, is driven dramatically by mix. And across RPM, we could spend hours on this, but I'll just give you one good example in terms of where mix improves gross margin in ways that has nothing to do with raw material costs.

In our Roofing business, we have a straight material component and then our WTI contracting component. And while their EBIT contributions are roughly equal, the gross margin in our material sales is dramatically higher than the gross margin in our WTI contracting business, which is lower than RPM's average. So construction products, roofing, the mix between WTI contracting and material can drive a meaningful difference in gross profitability at the segment level and then marginally for RPM. So a lot of moving factors in that question.

The next question is from Aleksey Yefremov with KeyBanc Capital Markets.

Fiberglass grew 20% this quarter. Can you keep growing in this range in fiscal '26. And could you size this business for us, please?

Sure. I don't know the specific detail on that. I don't know that we've disclosed a specific fiber-grade growth rate, but I can tell you that our fiber grade business has been growing. It's part of our Performance Cuttings Group. It's been growing at a level higher than RPM or certainly in double digits. A lot of it is the benefits of some acquisitions in the past, we put Bison with our fiber grade business. That's the rooftop decking, commercial decking. We acquired a business in the middle of the year in Europe, which is the Bison of Europe called TMP Convert and they do a lot of DIY stuff, but also commercial. But organically, we're also seeing really strong growth. That business has benefited most from data centers of any of the businesses at RPM because of the nonconductive nature versus steel of their products and our team's ability to meet the specifications and the speed requirements once these things start in terms of construction. So it's been a real bright star for us, both in terms of acquisition and growing that business from what was predominantly a U.S. business is something more global, entering into DIY actually through a partnership with our DAP business and then also broadly not only organic growth but their benefit in the data center activity.

[Operator Instructions] The next question is from Arun Viswanathan with RBC Capital Markets.

Congrats on the strong results. Maybe I'll just ask one question on the MAP savings. So for a little while there, Frank, I think you were alluding to the fact that you guys have taken out a lot of costs. But unfortunately, the volume environment was such that you couldn't really see the benefits drop to the bottom line. You are starting to see that now. Margins are obviously rising in the right direction, but maybe you can just comment on how much more margin growth you expect to see if you do kind of hit that mid-single-digit organic growth that you just spoke about and if there's any leverage that would come from the acquisitions as well? And how much -- i.e., how much more improvement in margins we could expect over the next little while?

Sure. I appreciate that question. So as most on this call knows, we've been talking about a 16% EBIT margin since the fall of 2018. And our efforts to attain that had been interrupted by COVID, supply chain challenges, inflation, you name it. But it is still a target that is very deeply embedded within RPM. I think if you try and average out all the crazy volatility that the whole world and certainly business has been tough in the last 7 or 8 years, we've been able to sustain about a 40 or 50 basis point improvement in margin year-by-year. And I fully expect over the next 2 or 3 years that we're going to get to that 60% margin target. It didn't come as quickly as we wanted, but it's still front of mind. It still has some incentive compensation tied to it, and it's still a goal that we expect to achieve. We will not get to a 60% EBIT margin in fiscal '26, but we'll make progress.

And then just one more quick one, if I could. You guys have often noted M&A as maybe a principal area for capital allocation, but that's been a focus mostly on bolt-ons. Is that still the expectation that we should expect you guys to kind of head in that direction? Or would you consider larger deals? And maybe some adjacencies into, say, more gallon oriented paint, maybe you can just offer your thoughts on where you're headed M&A-wise.

Sure. I think the Pink Stuff is a good example of opportunities that we see that are in adjacencies or new product categories that fit with some of our strengths. And so we're very excited to become a bigger player in the cleaner space in our consumer group. So we will continue to look for acquisitions like that, that are a little more sizable than what we've done in the past, but the pipeline for bolt-on is pretty good. And particularly in places like our Construction Products group where they're out looking for components that they can add to the system sales, we'll continue to go look for $10 million and $50 million product lines that not only help us complete that more complete wall system sale or additions to asset management but where we think that our sales force can double or triple the revenues in a relatively short period of time. And so hopefully, that answers your question. We don't see paying huge multiples for $1 billion deals, but where there are $400 million $500 million nice-sized businesses like the Pink Stuff acquisition, we're going to go after them. And in the meantime, the bolt-on pipeline is pretty good.

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

Thank you to everybody for your participation in our investor call today. With our fiscal calendar, we have the opportunity to celebrate the New Year twice at RPM. And so I would like to wish everybody a happy RPM New Year, and we look forward to talking to you about our '26 results in October when we report our first quarter results and have our Annual Meeting of Stockholders. Thank you, and have a great day.

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