RPM International Inc. Aktie

Good morning. and welcome to the RPM International Fiscal 2027 First Quarter Earnings Conference Call. [Operator Instructions]

Please note, this event is being recorded.

I would now like to turn the call 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 2027 first quarter. Today, this call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; Mike 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 involve 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 see 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 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 the first -- first quarter fiscal 2026, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on the call. It can be accessed in the Presentations and Webcasts section of the RPM website at www.rpminc.com.

Effective June 1, 2026, certain Latin American businesses in the Construction Products and Consumer groups with annual sales of $128 million and $15 million, respectively, were placed in -- were moved to the Performance Coatings Group. This change has no impact on consolidated results, and details of the changes can be found in the Form 8-K filed today. Current and prior year results reflect the updated structure.

Now I will turn the call over to Frank.

Thanks, Matt, and thanks to everybody on the call this morning. I'll begin on Slide 3 with a high-level overview of our performance. Mike Laroche will review the financial results, then Matt Schlarb will cover our balance sheet cash flow and discuss some of our successes in the emerging markets. And then Rusty Gordon will finish with our outlook.

Our results show we delivered record first quarter sales, adjusted EBITDA and adjusted EPS despite sluggish end markets and several temporary operating headwinds. These results demonstrate the strength of our balanced business model. Broad-based growth in Performance Coatings Group and Consumer more than offset temporary softness in our Construction Products Group. Additionally, our SG&A optimization actions played a role in offsetting raw material inflation and other expenses.

Slide 4 illustrates how our SG&A optimization actions helped offset gross margin pressure. As expected, we offset raw material inflation on a dollar basis, but gross margins declined 100 basis points as the rate of raw material inflation outpaced pricing and MAP benefits in the quarter. Even with that pressure, we compensated for this by leveraging SG&A as a percent of sales to maintain the adjusted EBITDA margin, consistent with the prior year quarter. This outcome reflects the benefits of the SG&A focused actions we have implemented across RPM. These savings helped offset the gross margin headwinds while also allowing us to continue investing in growth and serving customers.

We are pleased with the organization's cost discipline and the ability to grow in an uncertain economic environment, and we continue to expect additional pricing and operational improvements to support margins as we face continued inflationary pressures during the balance of our 2027 fiscal year.

Slide 5 highlights emerging markets generating more than 20% revenue growth, fueled by demand for engineered solutions for high-performance buildings and infrastructure. North America delivered solid growth, led by strong performance in our Performance Coatings Group and our Consumer businesses. European growth was primarily driven by acquisitions. Our emerging market success was driven by our Platform Group structure, which oversees operations across RPM businesses in these regions. The Platform Group reports as part of our Performance Coatings Group segment, but sells products for businesses across all RPM segments.

Historically, our decentralized structure limited our ability to fully capitalize on emerging market opportunities. Several years ago, we created the Platform Group to have a more cohesive strategy and operations in Africa, Middle East and the Asia Pacific regions. Following several years of successful growth, at the beginning of this fiscal year, we added South American businesses to the Platform Group as well.

The structure has been successful for multiple reasons. First and foremost, because an excellent management team has leveraged assets where it makes sense, such as shared manufacturing and distribution facilities while still providing autonomy to local sales teams who understand the market's best. Additionally, businesses across RPM have increased cooperation to provide support to our Platform Group in areas including brand management and product development.

The Platform Group is an excellent example of the power of RPM in action, leveraging our leading products and services alongside the scale of our businesses to drive growth and profitability. The addition of our South American businesses further enhances our ability to capitalize on that scale and accelerate growth in this important region.

So to summarize the quarter, we made tangible progress on SG&A expense reduction which, along with other MAP initiatives and our strategic balance, helped us offset higher inflation and temporary market slowdowns in our Construction Products Group. We'll provide more details on these operational improvements and other aspects of our MAP 2030 at a previously announced Investor Day on November 9 at our Stonhard facilities in Maple Shade, New Jersey. Scheduled speakers at our Investor Day in November 9 include myself; Dave Dennsteadt, our newly appointed President and Chief Operating Officer; Rusty Gordon, RPM's Vice President and Chief Financial Officer; and our Performance Coatings Group President, Greg Michael. If you would like to attend in person, please contact Matt Schlarb as there is some limited availability. We will also be webcasting the event, which will start around noon Eastern Time. Details on how to join the event are available on our website.

I'd now like to turn the call over to Mike Laroche to provide more details of our quarter.

Thank you, Frank. Turning to Slide 6. First quarter sales increased to a record, led by our Performance Coatings Group and Consumer segments, which both had solid organic growth. Adjusted EBITDA increased to a record. Higher sales and MAP benefits, including SG&A optimization actions, more than offset raw material inflation, warranty expenses and bad debt expense. In nonoperating expenses, health care expenses declined, driven by our team's effort to reduce prescription drug costs. Adjusted diluted EPS increased 5.3% to a first quarter record $1.98.

Moving to the segment details on Slide 7. CPG sales increased driven by the Kalzip acquisition. Organically, sales declined, reflecting a slowdown in education and health care markets, which together comprise over 1/4 of CPG's end market exposure. We also experienced finished product shortages caused by the supplier raw material constraints in polyurethanes we called out last quarter. Adjusted EBITDA declined as lower volumes reduced fixed cost absorption, while inflation, bad debt and warranty expenses were additional headwinds. SG&A optimization partially offset these items. While the quarter was below our expectations, several of the profitability headwinds were temporary in nature.

Turning to Slide 8. The Performance Coatings Group delivered record results with broad-based growth led by engineered solutions for high-performance buildings, energy and infrastructure projects, particularly in emerging markets. Food coatings and ingredients also contributed to the strong growth. Adjusted EBITDA and adjusted EBITDA margin increased to a record as improved fixed cost utilization and SG&A optimization actions more than offset inflation.

On Slide 9, Consumer sales increased to a record, including 5.2% organic growth. Shelf space wins, new products and pricing supported this growth. Both adjusted EBITDA and margin increased during the quarter. Higher volumes improved fixed cost utilization, while MAP and SG&A optimization also contributed to increased profitability.

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

Thank you, Mike. Moving to Slide 10. We generated another quarter of strong cash flow driven by improved profitability and working capital efficiency. Working capital improved 150 basis points compared to the prior year despite the volatile raw material situation. As a result of the strong cash flow generation, we returned $90.5 million to shareholders through share repurchases and dividends, an increase of 10.2% year-over-year.

Total debt declined $263 million as we used some of this cash flow to repay debt. Looking at our leverage, as you will see in our 10-Q filing later today, it has returned to a similar level to where it was prior to The Pink Stuff acquisition in late fiscal 2025, which is the largest acquisition in RPM's history. Subsequently, we have also completed several other acquisitions, including Ready Seal, Kalzip and PAVA resin. Most recently, we acquired Volteco at the beginning of October. Volteco is an Italy-based leading supplier of below-grade waterproofing solutions used globally in demanding applications. The company generated calendar year 2025 sales of EUR 28 million. Volteco has joined the Construction Products Group and provides complementary technology to their leading waterproofing solutions.

Turning to Slide 11. As Frank mentioned, we have taken a more collaborative approach to operating in emerging markets with our platform structure. The investments we have made in the region and in our associates there have contributed to double-digit growth in the region for multiple quarters. Similar to other geographies, our solutions are resonating with owners and builders of high-performance buildings in these markets. As a reminder, high-performance buildings have demanding specifications where the cost of building failure is elevated. With our people, service, engineered solutions and the trust we have built in the marketplace, we have been winning more of these jobs and are optimistic that emerging markets will be a key growth driver for us in the future.

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

Thank you, Matt. Turning to Slide 12, I'll provide an update on raw materials before we get to the outlook.

Inflation expectations have increased since we held our last earnings call on July 22. As we mentioned in July, there were shortages in polyurethane feedstocks during the first quarter, and those became more pronounced than we had expected and negatively impacted sales. Our procurement team quickly secured additional supply to mitigate the impact, but at a higher cost that, because of FIFO accounting, will impact our P&L. Additionally, the sustained rise in oil and other commodity prices over the past couple of months has caused our inflation expectations to increase in other raw material categories.

As a result, we now expect second quarter inflation will be in the 9% to 11% range, up from our previous estimate of 6% to 8%. For the third quarter, we anticipate inflation will be 7% to 9% as inflation remains widespread, but we start to annualize prior year inflation in some raw material categories. We have implemented additional pricing increases across all our segments, which will help offset this inflation, but it will lead to gross margin pressure for the year.

Now moving to the outlook. Our second quarter outlook is on Slide 13. We expect consolidated sales to increase in the low to mid-single-digit range. By segment, we expect CPG sales to increase in the low single-digit range; PCG in the mid to high single-digit range; and Consumer in the low to mid-single-digit range. We expect consolidated EBITDA to also increase in the low to mid-single-digit range. SG&A optimization actions, pricing increases and MAP benefits are expected to offset sluggish end markets, inflation and start-up costs at new shared facilities.

Next, moving to our full year outlook on Slide 14. We are narrowing our fiscal 2027 sales growth to mid-single-digit growth from our previous outlook of 3% to 7%. Adjusted EBITDA is now expected to grow mid-single digits compared to a previous outlook of up 5% to 10%. MAP benefits, including the previously announced $75 million of SG&A-focused savings and incremental pricing, are expected to offset persistent inflation, which has increased from our previous outlook. Additionally, we'll face start-up costs at new facilities and more challenging comparisons in the second half of the year. Towards the end of the year, we do expect our CPG segment to return to positive organic growth.

That concludes our prepared remarks. We will now be happy to take your questions.

[Operator Instructions] Our first question today is from John Roberts with Mizuho.

For the CPG segment, for the health care and education markets specifically, what's the outlook there? I think Rusty just said, we expect CPG to be positive by the May quarter. Do we expect education and health care as well or are we just going to offset continued headwinds there?

I think we'll see a rebound in both of those areas. In the school system area, it is a slowdown in part driven by funding at local levels and state levels, and we're starting to see some of that free up. But given the nature of our Tremco Roofing business in particular where it's most acute. If we don't see it this fall, it really won't show up in terms of activity until the spring of next year.

And in the health care sector, we think it's a temporary slowdown. But again, in both instances, we would expect to see improved results and improved activity in the second half of the year. That's why we've addressed a reduction in our outlook for Q2.

And then customer bankruptcies have popped up a couple of times now in recent quarters. With the higher interest rates and weak end markets, are you increasing your provisions in your guidance?

Our provisions are appropriate. A prior bankruptcy was related to a retailer that was serving our Industrial Coatings Group. And in this case, we actually took a charge for a defense project that we're on and it was a defense contractor that declared bankruptcy. We wrote off the receivables, but believe that we'll have an opportunity to recover a significant amount of that given the nature of the project.

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

I guess maybe just to flesh out the CPG side a little bit more, so I guess can you help us to think about how much of the weakness was tied to the education and health care side versus the product shortages due to some of the supplier raw material challenges? And how quickly or are we through the supplier raw material challenge issues, or do they drag on for another quarter or so?

Sure. The polyol issue negatively impacted the Construction Products Group in both our sealants business and roofing business as it relates to urethanes and coatings. And we're one of the leaders in roof restoration coatings. So it was a drag to sales. The shortage issue is now behind us in terms of production, but we're catching up on inventory in Q2. So we still have some work to do. And it's part of our understanding as to how things will recover. Some of this is work we have to catch up on, on a backlog of projects that we couldn't fulfill because of raw material shortages.

On the weakness in education and health care markets, some of that's just a shrinking backlog, again, principally in Tremco Roofing and our WTI contracting business. And we are seeing efforts to rebuild that and they're moving in the right direction. I think sequentially, you'll see an improvement in Q2 over Q1 in our Construction Products Group. But again, given the seasonal nature of our roofing business, that rebuilding backlog will impact our second half of the year and really the spring months, so the end of Q3 and into Q4.

Okay. Fair enough. And then maybe more positively on the Consumer side, saw a nice lift in terms of organic sales. I guess, can you help us to think about how much of that was volume driven? It seems like that business has been struggling for now really a number of years to drive growth. And it seems like you may be turning the corner. I guess I'm trying to understand if it's any real true end market demand or if it's more about the shelf space that you're picking up and maybe some of the new business wins. Can you help us to think about that and unpack it a bit?

Sure. I'll provide a couple of high-level comments and then turn it over to Matt Schlarb for some more detail. So at a high level, the underlying dynamics, quite candidly, are not getting better. Consumer takeaway and foot traffic in major retail customers of ours is still sluggish. The housing market and housing turnover is not getting better. And with rising interest rates, we don't expect to see that.

We had positive unit volume growth and positive organic growth in Consumer for the first time in a number of quarters. And it's really related to 2 areas: market share gains and some new placements, and after a slow start, improving results in The Pink Stuff in our cleaners category.

Matt, do you want to add some color to that?

Yes. Like Frank said, The Pink Stuff, it's nice to see some positive momentum there. Last quarter, we talked about they had the experience of slowdowns. We've also had some wins in abrasives. That's the business we acquired a few years ago. The Ready Seal, that's the exterior wood stains business, has performed really well since we acquired it.

Another category, we've had some wins is in primers where there -- we've taken some shelf space and had some additional pickup at stores through that. So it's a combination of all these different wins that you add them up, and it helps to offset some of the soft economic backdrop that Frank talked about.

So those new placements, whether it's in abrasives, we're doing really well in retail automotive, some shelf space and, quite candidly, just expansion of our Zinsser primer given some dynamic shifts in the customer base will continue in Q2. And it's nice to see our Consumer business beginning, albeit modestly, to building some positive momentum after a tough couple of years.

The next question is from David Begleiter with Deutsche Bank.

Frank, on the full year guidance, I believe you lowered it by roughly $25 million at the midpoint. Can you just break that down, what the components of that reduction for the full year guide?

So it's a little bit of a swag in the sense that I think we have some good visibility into Q2. But we're making some assumptions about, as Rusty highlighted, inflation beginning to trend downward, but still be at a higher level than we anticipated just a few months ago as we get into the spring. And it's really a bet on when we'll see a recovery in our Construction Products Group, and specifically Tremco Roofing. So those are the dynamics there.

And given costs, given inflation and how energy costs have now melded its way into materials, also freight is up meaningfully, whether it's truck transportation, ocean going. And so we're instituting some freight surcharges across a number of our businesses, along with price increases. So it's a pretty dynamic market. I think that's the best we have for you in terms of how we developed the full year guidance.

Got it. And just on Q2, the price cost differential given the increase in inflation assumptions, I presume you're expecting pricing to lag costs on a dollar basis in Q2. Is that accurate?

So we have covered dollar-for-dollar inflation in Q1, and we'll probably do a little bit better in Q2. As Rusty mentioned, given FIFO accounting for RPM, you typically see a lag in our reported results between inventory and how it flows through our P&L.

I'll remind folks that when we went through the last bout of inflation, our gross margins from start to finish improved. And I would expect the same thing as we go through this bout of inflation, which to the extent that it is related to disruption in the Middle East, any stability there and return to moderate inflation will allow us to see margin improvement once again.

It's interesting, we saw little or no inflation for a 6-month period from the end of calendar '25 through the late spring of '26, and even some reduction in raw materials. We were not planning on price increases. And we've adjusted pretty quickly. I think we and others have learned how to adjust in this volatile market.

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

Hakim on for Matthew. My question is on the warranty charge. Can you provide more color on that, and if we expect to see that going forward or additional charges?

Sure. That's related to a specific business unit of the Construction Products Group in Europe. And that is an element of a likely closure of that business unit, the details of which we'll provide at the Investor Day.

We are looking across our portfolio and either product lines or business units that are underperforming. And from a margin goal perspective, not likely to meet our goals, taking a hard look at a number of fixed or exit items, and that falls in that category. So it is unique to that business unit, and we do not anticipate further warranty issues there.

The next question is from Patrick Cunningham with Citi.

This is Alex on for Patrick. In Consumer Group, maybe I was hoping you could kind of share some of the growth in Q1, what were sounding like the new product introductions, were there any kind of share wins in the business? If you could kind of help us understand the Consumer segment.

And I know it's a small part of your overall sales, but maybe on a high level, could you also kind of help us understand what you saw in Europe?

Sure. European sales growth is primarily driven by acquisition activity. Economic dynamics there are not really strong. We're continuing to see profitability improvement there driven by internal actions, consolidation across distribution, different administrative areas. So that's what's happening in Europe.

I'll let Matt repeat what he commented on a few minutes ago. We've had a number of shelf space gains, market share gains and new product introductions in Consumer which were commented on by an earlier question.

Yes. And I'll just add on to that. In addition to some of the product wins that I mentioned, we're winning in different sales channels places like grocery stores, we've had wins. Digital -- online distribution, that's another place where we've seen good growth. So it's a combination of both new products plus these different sales channels where we're having nice growth.

The next question is from Ghansham Panjabi with Baird.

Frank, just kind of stepping back a little bit, since you last reported, obviously, interest rates are up quite a bit and oil has flared up again along with raw materials, as you commented on before, do you sense any sort of change as it relates to underlying demand as it relates to conversations with your customers, as it relates to the outlook, et cetera? It doesn't look like you've seen it so far, but of course, there's lagged impacts from some of these dynamics I just touched on.

Sure. Appreciate the question. Long term, not really. You see strength in our PCG business group, and we're still seeing good work in tech, good work in onshoring and manufacturing, still benefiting from data center build-out. And within our Construction Products Group, the one real bright star there is Euclid, for all the same reasons.

We believe that the slowdown in schools is temporary and really related to funding issues, again, at the local and state level, probably to be freed up once we get through this election cycle. And the hospital situation also, we believe, is temporary.

We have some work to do to rebuild the WTI backlog, which is happening. But as I commented earlier, big picture, I think the trends are good specific to RPM. We won't see a return in those businesses to the type of industry beating and peer outperformance that our CPG unit delivered for like the last 8 quarters until we get in the spring. So we see a return to that. But again, part of it is where we are in the seasonal cycle, and just being candid about when people can expect to see us get back to the type of top line performance the CPG group has been delivering.

Okay. Perfect. And then for the Consumer business, the first quarter, call it, 5% or so sales growth. You called out shelf space wins and new product introductions, et cetera. As it relates to the growth guidance for 2Q for the segment of low to mid-single digits, is the difference between the 2 just the new products and the shelf space wins? Or am I reading too much into it because it is a broad range?

No. It's new products and shelf space wins. It's an improvement in The Pink Stuff and the [ cleaners ] category, which has been separated as its own business unit within consumer. And so that's nice to see. And it's self-help and really a lot of good work by our Consumer Group associates because the underlying dynamics in terms of consumer takeaway, foot traffic, housing prices driven by interest rates and housing turnover, we do not see any signs that that's improving.

And so you can see decent results, and you'll see them again in Q2. The whole industry and our whole peer set will be a happier place when the housing turnover starts to perk up and foot traffic starts to pick up a little bit. Would remind you that housing turnover's at a 40-year low. And with rising interest rates and mortgage rates, that's not going to get better until things improve in that realm.

The next question is from Frank Mitsch with Fermium Research.

I wish your team good luck this Sunday, but we both know I don't mean that.

You and I need a Fermium-RPM swag, but on the Jets-Browns this weekend.

That can be arranged. I'll have to run it by the Board of Directors, but we'll come back. Apologies if I missed it, but what was price versus volume for the company and Consumer in the first quarter?

So typically, we haven't provided price on a segment basis. But you're looking at price on a consolidated basis up about 2% across RPM, and unit volume up decently, low to mid-single digits, in Consumer and PCG. And as indicated by our results and particularly specific to Tremco Roofing and WTI, for the first time in a couple of years, modestly negative in the Construction Products Group.

Terrific. Very helpful. And this is the second quarter that your buybacks exceeded $20 million per quarter. Obviously, with the shares trading where they are, how should investors think about the pace of buybacks from RPM?

The pace of buybacks at RPM will continue. Our Board has authorized a larger share repurchase. And given where our stock price is, I certainly would expect us to see a continuation of current levels, if not higher.

The next question is from Josh Spector with UBS.

I wanted to follow up just on price and kind of think about the cadence here. I mean 2 things here, is one, it seemed like last quarter, you guys were talking about pricing around 2%. It doesn't sound like it accelerated much sequentially, at least on a year-over-year basis. Are you having any trouble getting pricing in CPG or any of the other segments versus what you expected? And how do you expect that to ramp over the next couple of quarters?

Sure. So I would expect price in Q2 to be somewhere in the 2.5% to 3.5% range. And the other area where we will recover margin is surcharges around freight. That's one of the larger inflationary issues that's impacting businesses today.

We had announced price increases in Consumer that have gone into effect at the end of Q1 and in the beginning of Q2. And we are in the process of initiating new price increases across most of our Construction Products Group and Performance Coatings Group businesses here in Q2.

Okay. I guess what I'm struggling with a little bit is that, if CPG volumes are only down modestly, it would mean that pricing in CPG is pretty weak. I think if pricing was similar to the group, it'd be down closer to mid-single digits. So I guess specifically there, is there anything you'd comment to help clarify any of that? And just margins looking at the November quarter, would you expect them to be down much less than the 200 basis points plus you saw in first quarter?

Yes. Some of that is absorption and plants. Some of that is some continued excess costs as we do the final stage of transitioning out of what was the largest CPG facility in Toronto into mostly at Georgia plant. And so those are some of the extra headwinds.

But again, we covered dollar-for-dollar inflation. We expect to do modestly better than that, and we'll begin gaining, not just recovering inflationary cost, but regaining margin as we roll through the year.

The next question is from Abigail Eberts with Wells Fargo.

Following up on your assumptions for raw material costs, underpinning that, what are your assumptions for when the conflict in the Middle East resolves? Because it looks like you have costs decelerating through the year. I know part of that's pardon the polyol issues getting resolved and comparisons versus the prior year. But are you assuming that the conflict deescalates later on in the year?

Not at this point in time. Again, anticipating, even in the second half of the year, inflation that's in the high single digits is not something that we saw on our radar screen 2 or 3 months ago. Certainly, if there is a meaningful stability in the Middle East in the coming months or after the election, and oil prices respond accordingly, I would expect us to get back to lower inflationary periods. As I indicated earlier in the call, we saw, for a 6-month period, little or no inflation in our core raw materials some declines in certain chemical, more commodity chemicals, stability and freight costs. We were not planning additional price increases in the spring, and that changed pretty dramatically because of geopolitical events that you're referencing.

So we are not anticipating any good news there. And I think as the markets have indicated, if there's any stability and/or agreements that the markets believe will be sustained, you'll see a corresponding response in oil prices, which, first and foremost, should positively impact freight transportation costs and then get our raw material costs back down.

That's not cavalier. The 2 dynamics here are oil prices and energy costs and how they've translated now through supply chains. But also demand, which still isn't real robust. And so a sustained relief in energy prices and oil prices will either pick up business [ band ] or will drive down raw material costs given the lack of demand that we saw this spring.

Got it. And then just on Consumer, don't worry, not another question about shelf space wins. Yes. But you've mentioned the Consumer trading down in terms of product. Does that lead you to be concerned about your ability to push price increases at all?

No. We've been selective in price increases where we can. And I appreciate your reference to past calls about Consumer price elasticity. I can tell you a good example would be the 5-in-1, very unique patented spray nozzle that allows 5 different spray patterns to come out of a spray can. And what we learned is on the shelf to the general public, it was too high priced. We are picking up really nice shelf space and market share gains in automotive. And what we've discovered is the automotive touch-up spray paint user really values the different spray patterns there.

So we are learning across all of our businesses really from a value perspective where our premium products and our value-added products are appreciated and where they'll be purchased and where we can gain price. And across all our businesses, just like this example, we're also learning where there's price elasticity and where higher premium prices are not going to be successful. So I suspect most businesses are getting more sophisticated as we keep dealing with the volatility in these markets, and that's certainly been true of our Consumer Group.

And it's part of their success now. And so you're seeing a product category that's growing very nicely at a premium price because they found the people that value it.

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

I was hoping, Frank, that you could talk a little bit more about the emerging market success that you've seen, not just in this quarter, though it was very pronounced this quarter, but it seems like there's some momentum building and maybe some sustainable improvement here. So maybe some color on what you're seeing there. And I'm curious, does the success that you're seeing in emerging markets mean that it might make more sense for you to look at acquisitions or other means to get bigger in those markets now that you seem to have kind of solved the equation?

Sure. I really appreciate the question, Mike. And so the answer is yes to your second question. I think we have a leadership team, an organizational structure approach that will give us more confidence to pursue acquisition opportunities successfully in these emerging markets.

I'll give you the high level here, which is, I think -- really tells you about the trajectory. As recently as 5 years ago, the Southern Hemisphere developing world was slightly less than 5% of our consolidated sales. In the first quarter, it was 8%. And you will see that continuing to grow. We have been growing for almost 2 years at a high double-digit rate, both in sales and earnings. So you're seeing improved cash flow, improved margin profile and really good acceleration.

So we've got great brands across RPM, particularly in our industrial businesses, but we just weren't organized in a manner that worked in these developing countries. Today, this RPM platform approach, basically a leadership team in the region is responsible for manufacturing, distribution and administration across the entirety of RPM products sold in that region. And with the help from the primary brand owner businesses and that RPM entrepreneurial approach to customers in terms of independent sales and marketing, it's really paying off. And we expect that to continue for a lot of years.

And I appreciate your insight. You should expect to see, not large, but more successful additions to growth through acquisitions because we've got a lot more confidence in our ability to integrate them and make them work than we had a few years ago.

All right. Very helpful. And then I was hoping if you could give some updated thoughts on just the operational front. It sounds like maybe we're still seeing some lingering impact from consolidation and start-up costs and maybe some temporary inefficiencies in your manufacturing costs. Any thoughts on the timing of when we see some of those inefficiency turn into benefits and start to see that flowing through the P&L?

So I'll give you 2 quick comments there. Number one, we'll provide more detail on your question at our Investor Day on November 9, so we can do so in a way we're not prepared to now, more specificity about when you'll see the benefits of the consolidated distribution in Europe, when we'll get the transition behind us in CPG. So we'll have that detail by November 9.

The other thing I'd point to, and Matt Schlarb highlighted this in his comments, we're continuing to improve working capital efficiency, and that is good RPM MAP-focused benefits on the factory floor, and there's more to do there. And we'll provide more details at our investor deck.

On our Investor Day, you're going to see the same type of detail that we have provided in our last MAP initiatives. You're going to see a Waves Plan focused on efficiency and operating improvements. You're going to see goals on growth. I would take the Waves Plan to the bank because we've shown 2 of those and we've made them happen. We need to prove to the market that we can hit our growth goals and really talk about the new initiatives that allow us to do that. So we're pretty excited about November 9.

You'll also see our Stonhard operation in Maple Shade, New Jersey. I would bet it's one of the most productive plants in the whole industry. So we look forward to showing that off as well.

The next question comes from Salvator Tiano with KeyBanc Capital Markets.

I was just wondering here, given the spike in interest rates, especially in the past month or so, how's your view on what leverage is appropriate for RPM or what you can do in terms of buybacks or M&A changed recently? Or for now, everything is staying the same?

Sure. So we've always operated with a goal of maintaining an investment-grade rating. We're middle BBB rated today. We have about $1.2 billion in liquidity between cash and unused committed credit. I think we could use up the entirety of that $1.2 billion and then some and still maintain an investment-grade rating.

Our debt-to-EBITDA has, while maintaining that low investment-grade rating, been at or above 3. And today, we're meaningfully below 2. So we've got a lot of room in our balance sheet. We see opportunities. They tend to be small to medium-sized deals and M&A. And as I commented earlier, given weakness across a number of our industry peers and certainly in RPM and our stock price, we have ample dry powder to repurchase shares on an opportunistic basis.

Perfect. And besides, obviously, a weakness in the RPM stock price, I wonder, are you seeing perhaps some stress within smaller competitors that potentially could make other deals more attractive going forward?

I think the biggest thing that's making deals more attractive in this environment is a combination of slow growth and higher interest rates, and P/E that was very aggressive across industries, but in our space as well, let's say, 5 or 7 years ago. And there are 2 factors there. They're sitting on a lot of properties that are underwater because of economic dynamics that I just referenced. But more importantly, they're not in the markets with crazy multiples. There were instances in the last 5 years when, let's say, 4 or 5 years ago, when there's a property there and the fourth, fifth and sixth buyers are big strategic public companies, and the first, second and third buyers are P/Es. That's over. And so you're seeing multiples in the M&A environment down by 2 or 3 points, in my opinion, principally because P/E is not the competitive factor in M&A activity today than they were, let's say, 5 years ago.

The next question is from Kevin McCarthy with Vertical Research.

Frank, was the month of September notably better or worse than you might have anticipated across any of your major business lines?

We will give you the month of September and/or it in conjunction with October and November when we report our second quarter. Other than to say, from an outlook perspective, nothing's really changed. I think somebody had commented earlier that a good indicator of what our second quarter will be is kind of what our first quarter is. We expect really good strength in PCG, continued stability and benefits from some market share gains and shelf space gains in Consumer, and a sequentially better but still less than what we've been delivering on in the Construction Products Group.

Okay. Fair enough. And then if I may ask a broad question. It strikes me that your Performance Coatings results were quite strong, whereas we've spent a lot of time on the call talking about maybe some volume pressure and other issues in Construction Products. If you compare and contrast those segments, Frank, what accounts for such a large difference there? Is it the notion that the health care and education customers in CPG are not linked to industrial production, so the IP side is running stronger than maybe some more GDP-oriented businesses? Or have you seen this kind of divergence in the past? Curious to hear your thoughts along those lines.

Sure. I think there's 2 primary reasons. Good question. One, the Performance Coatings Group is more driven by industrial capital spending. So manufacturing, onshoring, the data center activity. But also importantly, the Performance Coatings Group is where our Platform approach is housed. And so that's also adding to the strength of the Performance Coatings Group numbers. And we, as I said, we expect that to continue.

The Construction Products Group, quite candidly, has had extraordinary 2 years of performance given the underlying dynamics of commercial construction activity. And so it's disappointing to see a quarterly slowdown. We believe it's temporary for this in the second quarter. But the underlying dynamics there in commercial construction and broad construction activity have not been great, and that more heavily impacts our CPG versus the industrial capital spending and, more broadly, international presence of the Performance Coatings Group.

Next question is from Arun Viswanathan with RBC Capital Markets.

So just wanted to get your thoughts on margins. It looks like there's potentially some extra raw material pressure kind of flowing through. So how do you expect that to kind of evolve over the next few quarters? And do you expect to be successful on some pass-through price? And I guess maybe if you can just elaborate on that by segment, that would be helpful.

Sure. I think that, as we commented earlier, we're successful in passing on the dollar impact of inflation, and that will continue. We'll be gaining on margin improvement as we sequentially go through the year. And then as we've done in the past, it's my expectation that we will recover 100% of any lost margin and maybe a little bit more.

The one area where that will not be true is in freight surcharges. So we are passing on dollar-for-dollar freight surcharges in many of our businesses to customers. And as those freight costs come down back to normal levels, then if and when we resend those temporary surcharges, that's literally just covering your dollar expense. But we'll pick up margin there too just based on the impact of the higher sales on a lower expense base.

Okay. And maybe as a follow-up I can just ask this a slightly different way. But I think in the past, you talked about 16% EBIT margins, which would be kind of 200 basis points or more at this point recovery, and getting to that point kind of on a structural basis maybe through some of the MAP actions. Is that still kind of in your line of sight? Maybe you can kind of think about how you're thinking about longer-term margin recovery and ultimately growth.

So 2 quick comments on that. Number one is we had set out a goal of 42% gross margins and a 26% SG&A on a consolidated basis. We were close to the 42% gross margins and had line of sight to achieving that. And then here we are in another round of inflationary pressures. I am highly confident as we get through this inflation cycle, we will meet or beat that 42% goal.

We struggled for both some cost reasons and lack of revenue growth, so leverage on the top line, on our SG&A goals. We took a very aggressive crack at that with a $100 million expense reduction program that was initiated in January of last year. So in the grand scheme of things, those previously announced goals were still in play.

On November 9, you will see some pretty good detail of our expectations of our margin goals, cash flow goals, profitability and what we think we can do revenue-wise out to 2030. So I would encourage you to attend our November 9 Investor Day, which is going to be in Maple Shade, New Jersey, right outside of Philadelphia. So 20 minutes from the airport or an easy ride from New York. And that will also be webcast.

The next question is from Jeff Zekauskas with JPMorgan.

You guys did a very nice job of growing your cash flow from operations year-over-year, as well as your EBITDA. Should you be able to do that in 2027? That is, do you think your cash flow from operations will grow versus 2026?

Yes. And it will be a result of continued improvement in working capital, which we are very focused on. An expectation, albeit at a lower rate, of continued positive momentum in earnings growth as we get through the year. And it is an area, again, that we will highlight in a little bit more detail at our November 9 Investor Day.

And can you give us a little bit of quantification around your expected decreases in medical costs in that, what were they roughly last year? What could they be this year? And is it your general expectation that SG&A expense this year year-over-year should be pretty flat, last year?

So I think a couple of things. One, year-over-year, you'll see an improvement in corporate expense. We had huge increases last year in health care expense, which we talked about quarter-by-quarter. I don't have off the top of my head the exact number. We can get that, communicate that in follow-up calls. But we are seeing a flattening out of those health care costs versus where we were last year. And so corporate other expense will be equal to or slightly down each quarter as we get through the year. And so that's a positive element.

And then the second part of your question, Jeff, was?

I think you captured it, with respect to medical expenses and flattening out of SG&A.

Okay. Yes, you'll see that.

The next question is from Vincent Andrews with Morgan Stanley.

I just had one last question on the health care and education. I just wanted to better understand, is this a few projects? Is this a lot of projects? Is it concentrated in certain states or regions? Was it in the backlog and it's just been delayed? Or was it stuff you thought you were going to win and put in the backlog that just the timing of it becomes uncertain? Just trying to get a better sense of sort of the visibility you have on it returning later in the year. And just is it waiting on municipal funding or something else that's just sort of technical? So any further color you could provide there, I'd appreciate it.

Sure. The simple answer is yes to all of the above. And so without providing any competitive detail, there are some specific regions, and in this case, a lot of states. So for instance, there are some specific states where we have really good market share in education and there has been delayed funding. And so we are specified on projects and the funding has been delayed, and we are at the point where it didn't happen in the summer. And if it doesn't get initiated now, it's a spring project. Just the nature of the beast.

And so in some cases, there are very specific, in this case, state-level projects, that we know we will have, but they've been delayed. In other cases, it's the lack of big projects that we had last year and into the spring that are not repeating. And so the normal cadence of our average activity is fine. It's the mismatch of some larger projects that, quite candidly, we need to be rebuilding in our WTI, which is our contracting arm backlog.

[Operator Instructions] The next question is from Eric Boyes with Evercore.

Maybe first, how repeatable is PCG's growth into fiscal 2Q in the second half? I mean relative to 1Q's double-digit growth, does mid to high single digits, is that tougher comps or project timing or seasonality or just kind of margin of safety?

Sure. In both our PCG and CPG, every quarter's a tougher comp because we've been generating pretty solid results in each of those segments for the last couple of years. But as indicated earlier, the same dynamics that drove results in Q1 seem to be continuing in Q2. So you'll see solid results in our Performance Coatings Group both driven by the dynamics in our core North American and European markets and continued outsized growth from the Platform Southern Hemisphere business activity.

Okay. Great. I appreciate that. And then I just wanted to clarify, margins again, on gross margin specifically. With inflation kind of trending downward and some of your agility on pricing, could we potentially see year-over-year gross margins positive again in fiscal 3Q? And then I think it's a little bit a tougher comp in fiscal 4Q, but any color on kind of that gross margin cadence based on what you see today would be appreciated.

Certainly. I think we'll start to see some improvement in margin as we get through the year, and anticipating a decline in inflation at some point, whether it's next spring or a year from now. As we have done in the past, we will recover the lost margin and probably then some. So as I commented earlier, 42% gross margins were in our line of sight, excitedly, because we've been talking about them for a few years. And when we get through this margin cycle, we will be at or above that level.

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 who participated in our investor call this morning. We're pleased with our first quarter results and the execution of our associates in what continues to be a VUCA environment. Our focus remains on serving customers, investing in differentiated growth opportunities and advancing our operational improvements that support stronger profitability and improved cash flow.

We'll be excited to see many of you at our November 9 Investor Day in Maple Shade, New Jersey, outside of Philadelphia. We will also be hosting virtually the RPM Annual Meeting of Stockholders tomorrow at 1:30 Eastern Time and would welcome you to participate in that as well. It is highly likely that at a Board meeting in front of our Annual Meeting of Stockholders, RPM will be announcing the details of our 53rd consecutive increase in cash dividends.

Greatly appreciate your participation in our call today and look forward to having many of you on our Thursday, 1:30 p.m. Annual Meeting of Stockholders. Have a great day. And go Browns.

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

Good day, everyone, and welcome to the RPM International Fiscal 2026 Fourth Quarter and Full Year Earnings Call. [Operator Instructions] Please note that 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, sir.

Thank you, Cal, and welcome to RPM International's conference call for the fiscal 2026 fourth quarter and full year. Today's call is being recorded. During today's call are Frank Sullivan, RPM's Chairman CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Roche, 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 report filed with the SEC. During this call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website.

Also, please note that our comments will be on an as-adjusted basis and all comparisons are to the fourth quarter of fiscal 2025 unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the presentation and the webcast section of the RPM website at www.rpminc.com.

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.

Now I will turn the call over to Frank.

Thank you, Matt, and thank you, you all for being on this morning's investor call. I'll start with an overview of our fourth quarter results to provide an update on the current raw material outlook and operational improvements that we've been making. Next, Michael Laroche will cover financials, and Matt Schlarb will provide an update on cash flow, the balance sheet and our system selling approach. Finally, Rusty Gordon will provide our outlook after which we'll be happy to answer your questions.

Starting on Slide 3. We generated another quarter of record results with each segment growing sales and adjusted EBIT. By segment, our Construction Products Group and Performance Coatings Group continued to lead our growth. They achieved this above-market growth by focusing on maintenance and restoration solutions targeting growing end markets and winning a larger percentage of project spending through system selling and improved collaboration. While our Consumer segment continued to face challenging DIY markets, they generated record sales and earnings in part driven by acquisitions. Our associates demonstrated their ability to adapt to increased global uncertainty, procure raw materials continue implementing operational efficiency improvements and our customers with high-quality products and services. Nowhere is just more evident than in the Middle East, where despite severe supply chain disruptions they were able to find alternative raw material sources, navigate logistical challenges and deliver mid-teens sales growth on a year-over-year basis.

The combined actions of associates worldwide and the SG&A-focused optimization actions we previously implemented allowed each segment to achieve record adjusted EBIT and offset increased health care and insurance expenses as well as inflation to expand consolidated adjusted margins to a fourth quarter record, even against challenging comparisons to the prior year. This fourth quarter represents the 16th quarter of the last 18 quarters that we have achieved record adjusted EBIT results.

Turning to Slide 4. During the fourth quarter, our center-led procurement team did an excellent job partnering with our top suppliers and having contracts in place to ensure our business had sufficient raw materials and were insulated from spot price volatility. Our businesses led by the Construction Products Group and Performance Coating Group reacted quickly to the inflationary environment by implementing price increases where necessary which caused our price/cost mix to be slightly favorable in the quarter. While still elevated from the beginning of the calendar year, spot prices have declined from their peak. While we have limited direct exposure to spot pricing, directionally, it does impact where our index-based supply contracts are headed, and it currently suggests moderating inflation in the second half of fiscal 2027 as we continue to be challenged with inflation in the first and second quarters of the new fiscal year.

It is important to remember that the situation is dynamic, and our teams will adapt to changes as necessary. In the first quarter of 2027, we anticipate raw material inflation to be up 5% to 6% with pricing up by a similar dollar level. For the second quarter, we expect inflation could be as high as 6% to 8%. As we progress through the fiscal year, we anticipate that our price increases, including in our consumer segment will recover the gross margin percentage lost in the first quarter. From a supply availability perspective, we were in good shape throughout the quarter due in large part to the actions of our procurement team. Looking forward, supply availability has improved, although a fire at a supplier's plant has caused some tightness and propylene oxide drive raw materials in North America. Additionally, MDI supplies are also tight due to supplier issues. Our procurement team has done a good job finding additional sources of supply, which has limited the impact on us, but this market tightness will add to overall inflation.

An update on operational improvement is on Slide 5. We continue to make progress implementing operational improvements across our businesses, which was reflected in our record results. The SG&A focused actions we implemented last fiscal year are on track to deliver $75 million of savings in the new 2027 fiscal year. As a reminder, we consider this a down payment on our new MAP 3.0 strategic plan. Additionally, our Green Belt program continues to expand. We have now trained 620 RPM associates to identify opportunities, implement efficiency actions and track their progress. This program has developed a pipeline of more than $30 million of additional savings. We are now expanding it to administrative functions and are already starting to see benefits in this area as well. We are looking forward to providing a strategy update and additional details on our next operating improvement plan at an Investor Day, which will be held on Monday, November 9 of this year. The event will be webcast, and we will provide more information as to how to participate by streaming or live as the event approaches.

Turning to Slide 6. Another benefit of our operational improvement since our MAP 2025 operating improvement program was initiated has been cash flow. Thanks to four consecutive years of record adjusted EBIT and structural improvements to working capital efficiency, we have increased our average annual operating cash flow by nearly 90%. This has allowed us to complete strategic acquisitions, invest in organic growth projects and return capital to shareholders through dividends and share repurchases, while same time reducing debt. Although the teams have made significant progress in converting profitability into cash flow, we still have additional improvement opportunities ahead of us.

In summary, our record fourth quarter results reflected our emphasis over the past fiscal year and over these past several years on executing things that are within our control. These include leveraging our competitive strengths, focusing on maintenance and restoration solutions to drive sales and implementing efficiency initiatives to improve profitability and cash flow. I want to thank the RPM associates for their commitment and focus during this volatile economic period. And I look forward to RPM delivering continued growth in sales and earnings for our new 2027 fiscal year.

I'll now turn the call over to Mike Laroche.

Thank you, Frank. On Slide 7, consolidated sales increased 7.2% to a record, driven by engineered solutions for high-performance buildings and infrastructure projects, M&A and pricing to offset inflation. Adjusted EBIT also increased to a record as sales growth, including higher volumes, resulted in improved fixed cost utilization. SG&A-focused optimization actions also contributed to profitability growth and were partially offset by higher health care and insurance expenses as well as inflation. Adjusted EPS was a record, driven by higher adjusted EBIT.

Geographic results are on Slide 8. All international regions generated double-digit growth, led by emerging markets. Our collaborative platform approach in emerging markets continued to generate positive results as we are selling more engineered solutions for high-performance buildings and infrastructure projects. Sales in North America were up a solid 5%, driven by turnkey and system solutions for high-performance buildings. Growth in Europe was driven by M&A. Foreign currency translation also contributed to sales in most countries outside the U.S.

Now turning to our segments on Slide 9. Construction Products Group sales grew to a record with broad-based strength led by the concrete admixtures business. By end market, growth was strongest for roofing and wall systems for high-performance buildings such as data centers and infrastructure projects. Pricing increases to offset inflation and foreign currency translation also contributed to the sales growth. Volume growth and operational efficiency improvements leverage fixed costs and drove adjusted EBIT to a record. Mix- and SG&A-focused optimization actions also contributed to the record results.

Next on Slide 10, Performance Coatings Group achieved record sales with broad-based growth across businesses. Growth was highest in solutions for infrastructure projects, food coatings and ingredients, emerging markets and fireproofing systems for high-performance buildings. Pricing to offset inflation also contributed to the sales growth. Adjusted EBIT was a record, driven by higher sales, volume growth resulting in improved fixed cost leverage and SG&A-focused optimization actions. This was partially offset by a $3.2 million bad debt expense from a customer bankruptcy.

The Consumer Group results are on Slide 11. Record sales were driven by acquisitions and pricing to offset inflation. DIY end markets remain soft. Adjusted EBIT grew as MAP operational improvements, including SG&A-focused optimization actions more than offset reduced fixed cost absorption from lower volumes and inflation. M&A integration also added to adjusted EBIT growth. Adjusted EBIT excludes a $9.7 million noncash impairment charge related to the Color Group.

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

Thank you, Mike. The cash flow improvements Frank talked about were evident in the fiscal year 2026 as we generated $899 million of operating cash flow, the second highest amount in company history. We used a portion of the strong cash flow to reward shareholders through dividends and share repurchases, which totaled $349 million for fiscal 2026, an increase of over 7% from the prior year. Our Board recently authorized a $700 million increase to our share repurchase program, which is in addition of $115 million remaining under the previously authorized amount. We continue to view repurchases as a complement to our dividend are allowing for the financial flexibility to invest in organic growth projects, acquisitions or other capital allocation decisions that generate long-term value. CapEx for the year was approximately $224 million, slightly below the prior year and included targeted growth investments like the shared European distribution center and the new operating facility in India that will be used to produce products for several RPM businesses.

During the year, we used $202 million to acquire multiple businesses with a focus on adjacent consumer categories and components that we integrate into our system offerings. An example of this is CPG Kalzip's acquisition, a middle roofing and facades company, which closed in the fourth quarter. Once all the integrated into our organization over the next couple of years, we expect this acquisition to be margin accretive. The quarter remained strong at $1.09 billion, which gives us financial flexibility and capital deployment, including in acquisitions where the pipeline remains healthy.

Next, on Slide 13, we have some examples of our engineered systems for high-performance buildings, which have been a contributor to our ability to outgrow our end markets. Through a combination of strategic M&A and innovation, we have developed system offerings for all 6 sides of the building [indiscernible] than just selling singular components. This system selling approach offers a compelling value proposition to building owners. First, we can guarantee that our systems will perform to meet demanding specifications and can offer warranties to back up these guarantees.

Second, we make procurement similar by streamlining the decision-making process. Third, our system speed to construction time. As an example, we can manufacture a wall system in a factory, ship the wall system to the job site and assemble it there. This improves construction time by reducing the need for skilled labor, reducing weather-related disruptions and improving safety on the job site. System selling also provides benefits to RPM and increases the amount of RPM products in a given construction or restoration project. Our unique systems offer performance that others in the industry cannot which also helps us win the jobs.

We are continuously looking to expand and enhance our system capabilities often through the acquisition of a component that we can then integrate into our systems. For example, we have acquired multiple floor joint companies that allow us to provide high-performance flooring system that can handle increasingly heavy loads. We've also expanded our insulated concrete form systems through acquisitions that now allowed us to offer vertical and horizontal offerings throughout a building. The pipeline in this area remains healthy. We continue to -- we expect to continue strategic M&A in this area.

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

Thank you, Matt. Our first quarter outlook can be found on Slide 14. Please note that we have transitioned our primary measure of profit and loss to adjusted EBITDA. This change will help comparisons to peer companies and will better reflect underlying earnings during periods of acquisition activity. Results for fiscal year 2026, incorporating the use of adjusted EBITDA were filed in a Form 8-K today. The positive top line momentum we generated in the fourth quarter is expected to continue with all segments expected to grow in the mid-single-digit range. Our construction-focused businesses continue to focus on the highest growth factors, including data centers, energy and infrastructure projects as well as building restoration.

In Consumer, we anticipate improved results as comparisons are easier, and DIY markets have shown signs of stabilization. In total, we expect sales to increase in the mid-single-digit range. We expect first quarter raw material inflation to be in the 5% to 6% range. We have already implemented price increases to offset this inflation on a dollar basis with additional price increases to come as we recover the gross margin percentage. In the first quarter, we anticipate previously announced SG&A reductions will generate $25 million of benefits, partially offset by higher health care and benefit expenses. Taking all this into account, we expect adjusted EBITDA to increase in the mid-single-digit range which is in addition to record results in the prior year period.

Our full year out 2027 outlook is on Slide 15. We anticipate that many of the sales trends from the first quarter will continue throughout the year, including a stabilization of consumer end markets However, it should be noted that we have the least visibility in this segment. Additionally, we will benefit from increased pricing in response to inflation, although economic uncertainty limits demand visibility. Overall, we expect sales for the full year to increase 3% to 7%. Adjusted EBITDA is expected to increase 5% to 10%. Assuming current raw material costs remain stable, the rate of inflation will be highest in the first half of the year as the impact of the Iran conflict will have a greater effect on the P&L.

From a gross margin perspective, we expect price cost to be somewhat negative in the first half of the year and then become more neutral in the back half as additional price increases are implemented and cost inflation moderated. The temporary cost headwinds from plant consolidations in fiscal 2026 will diminish in fiscal 2027 as the plants are closed. However, a portion of this will be offset by start-up costs and several newly opened shared RPM facilities.

SG&A-focused optimization actions are expected to generate around $75 million in benefits during the year, although a portion of these will be offset by higher health care and benefit expenses. We are actively implementing other efficiency actions across the organization and look forward to providing more details at the November Investor Day.

That concludes our prepared remarks, and we'd now like to answer your questions.

[Operator Instructions] And that first question will come from John McNulty with BMO.

So Just maybe if we can unpack a little bit some of the strength that you're seeing in CPG and the PCG group. It sounds like some of it is coming from onshoring data centers. I guess, can you help us to think about how that plays out through your fiscal '27? And how much visibility you have on the trends that you're seeing in that space right now?

Sure. Backlogs remain strong across both CPG and PCG. But we had it, as you'll recall, in fiscal '26 a pretty motile year as did everybody. And unfortunately, given the [ honor gain-off again ] situation in the Middle East, the fact that we're going to restart the tariff wars, in fact, have already started and anticipate some more tariff activity at the end of this week. Our guess is it's going to be another [indiscernible] volatile year. We have an administration that seems to not like stability. In that environment, I think we've proven that we can perform pretty well, particularly versus the peers. And so backlog is good, anticipate a lot of volatility because of broader geopolitical and economic circumstances.

Got it. Fair enough. Yes, definitely a tricky environment. On the cost saves, as the second question, you targeted the $100 million or so of savings on the SG&A front. And I believe back at time, you'd indicated, look, a lot of that the execution was already happening and/or done. So I guess have you -- since then, have you seen any new opportunities, any other areas to enhance efficiency or further cost cutting? I guess how should we be thinking about that?

Sure. We -- and it impacted us negatively in the last 1.5 years relative to our gross profit absorption. But we will be opening and really getting up and running on joint distribution centers in Europe. We will complete the closure of our largest North American facility in Construction Products Group in Toronto and effectively transition that to plants in the United States. And there's a number of issues like that, which we will begin to benefit from, particularly in the second half of fiscal '27. As Matt commented, we continue to drive our Green Belt initiative. And so we expect our MAP program, which we track monthly and quarterly to continue to benefit efficiency as well. And then lastly, we'll be providing some more detail at our November 9 Investor Day, we talk about MAP 3.0 and some accelerating connectivity across RPM from an administrative perspective.

Got it. Is there a way to quantify some of those headwinds that die down with the joint distribution side and the Toronto plant closure, et cetera?

Yes, John. So like what we talked about last year was some of those inefficiencies from the plant salvation. They totaled about $20 million in our FY '26 results. We think that with some of the plant startups, it will be about half of that will be a P&L headwind as we go through FY '27. We'll be able to provide more details on things like that at the Investor Day.

So again, in the second half of the year, in particular, you're looking at picking up a positive benefit in the $10 million to $12 million range.

And our next question will come from Mike Harrison with Seaport Research Partners.

Congrats on a nice quarter. I was hoping that you could give a little bit more detail on the consumer business? How much lower were organic volumes in the quarter? And were there any particular product lines that were better or worse. And then I guess in terms of the outlook for Consumer, it sounds like you're expecting some stabilization in DIY. Is that just stabilization at a low level, or are there some signs of green shoots or any positive dynamics there?

So we overall had positive growth in the quarter. And as you would expect, we had kind of low to mid-single-digit unit volume growth in CPG and PCG and 2% or 3% negative volume growth in consumer. The consumer segment results were benefited by The Pink Stuff acquisition and the Ready Seal acquisition. And so that's really fiscal '26 in Q4. We're seeing some spotty consumer pickup. And so as we got into the summer months, there's a few areas of strength in terms of consumer takeaway. Again, it's volatile, but it does feel like after 2 years of a pretty steady single-digit negative decline in consumer takeaway and volume impact, that we're hitting bottom. That feels better than anticipating another year of negative results. I can't say we're seeing anything that suggests that there'll be a robust rebound. And so that's kind of where we are. As I mentioned in the earlier comment, we continue to expect volatility. The biggest impact of the tariff wars for us was indirect, principally with steel costs and packaging in our consumer business. And as the tariff wars renew, we're on the lookout for possible increase in packaging costs again.

All right. And then my second question is on the share repurchase. Historically, you guys have been pretty programmatic with your share repurchases, $12.5 million a quarter for a while, stepped up to $17.5 million a quarter for a couple of years. In Q4, you stepped that up to $25 million. Should we just assume that $25 million a quarter is the new repurchase rate? Or could the larger authorization maybe signal a willingness to be more opportunistic with repurchase activity going forward?

So two comments on that, Mike. One is broadly with a bigger and healthier balance sheet and really confidence they entirely new level of cash generation from our operations, which has been a significant win of our MAP initiatives, we have more capital to deploy. Our M&A activity seems to be pretty strong, but it's your typical RPM, small- to medium-sized transactions. So it allows us to consider as appropriate, more aggressive share repurchases. I think your assumptions about how to think about our share repurchases on a regular basis are correct. But certainly, with a stock price that has been declining with the broader market and what we feel is an industry outperformance, which we would hope will continue. There will be opportunities for us to be opportunistic in the event of weakness in our stock price.

And our next question will come from Patrick Cunningham with Citi.

Maybe just on the pricing side, I think you previously mentioned segment specific measures that were maybe 70% structural, 30% temporary. Are you currently executing to plan here? And any change in how you're using surcharges versus structural price versus some sort of index mechanism? And so what sort of level of pushback have you experienced so far?

Sure. In the quarter, price was up about 2%. We anticipate further price increases over the summer, some of which have been announced and won't hit until ended July or obvious time frames that will impact a little bit in Q1 and then more so in Q2. We have mostly driven price increases. And as you've seen over time, particularly in high inflationary periods, we've generally been successful in recovering price on a dollar-for-dollar basis. And then get on the strength of our brands and the unique nature of our businesses being able to hang on to that and then see margin recovery as raw materials begin to decline. We anticipate the same thing with a quarterly outlook for Q1 of a mid-single-digit top line growth in a better environment, that would generate some leverage to the bottom line. We anticipate about a mid-single-digit earnings growth, which the difference will be some challenges to our gross profit because of what's happening with inflation raw material in the first quarter. You'll see that continue a little bit in Q2, and then we anticipate that coming down. It's interesting to note that some of the underlying primary chemicals have not been as negatively impacted and as volatile as oil prices or gasoline prices, and that's a demand issue. So we're watching that very closely. The other frustrating thing is what I mentioned earlier, which is the impact on packaging, particularly steel packaging, which is not a direct tariff impact for us, but indirectly as a result of U.S. steel manufacturers raising prices.

Got it. No, that's very helpful. And then maybe just on the raw side, I think you and others in the industry have called out the dynamics within the Polyurethanes chain, I guess, is there any anticipated supply availability or operational impact there? And what sort of expectations for that to remain tight for the next several quarters?

Sure. So I think we've been really pleased with the exceptional work of our operating people in regions like the Middle East and Asia. We have not seen any raw material availability problems. We've been able to work around a few things. The exception is really not geopolitical related. It's here in the U.S. with a significant fire at a primary chemical producer whose downstream products directly impact Tremco Roofing. And so we will have some negative impacts, both in terms of costs. And in the first quarter, some negative impact on sales growth because of the inability to get that product should be moving in the right direction as we get through the end of the summer. That's a supplier circumstantial situation as opposed to anything geopolitical or tariff-related.

And our next question will come from John Roberts with Mizuho.

This is Saurav Deer on for John Roberts. I just have a question on the sales outlook for next year. So what's the underlying organic volume growth expectation in the low and high end of that sales guidance?

So for the full year, yes, it's up mid -- yes, so you know we've talked about sales growth being up 3% to 7%. And so as we sit here today, M&A should add about 1 point to that. We've talked about pricing being -- around, like -- frankly, around 2% in the first quarter or in the fourth quarter and up a little bit more as we progress throughout the year. And so if we're at the lower end of that range, that implies a little bit of volume declines. And if we're at the higher end of that range, that would imply higher volumes.

Yes. The -- if we can maintain the unit volume momentum in our construction products Performance Coatings Group, which will be compared to prior year records. And if the ability in the consumer business comes back, along with the elements that Matt mentioned, we should be at the higher end of that range. But as I mentioned earlier, we anticipate another volatile period of time in terms of the impact of a lot of geopolitical and tariff-related items that are now back in the table.

Got it. And on the High Performance Buildings segment, what is the pipeline of demand for 2027? And what's like the go-to-market strategy on that segment?

Sure. It's a grinded out everyday effort. We are delivering some unique capabilities versus some of our competitors by being able to warrant entire wall systems as opposed to just selling components. We're doing -- as you all know, 95% of our Tremco Roofing business is restoration and reroofing. And so that continues to have a solid backlog. Although, as I mentioned earlier, we could see some raw material costs challenges and some revenue challenges in Q1 related to this raw material supply issue, which is temporary. Those are the primary key elements there. We -- this new business, not relatively new to RPM bought 5 years ago in [ purier, ] is really starting to take off. Again, it's a renovation, restoration of major HVAC units. So we're seeing really good strength there. So it's really our people responding to the renovation or restoration needs in manufacturing and in major institutions. Underlying commercial construction continues to be weak, and we don't see that changing.

And our next question will come from Ghansham Panjabi with Baird.

Frank, just to call out in terms of concrete admixtures in terms of strength. Can you just give us a bit more color as to what's going on there? Is that RPM specific, you think? Or do you sense any sort of change just in the underlying demand environment for that segment?

Hi, Ghansham, it's Rusty here. Yes, we are definitely gaining share. There's been big M&A by peers, there's been regulatory action in the space against peers. And we are [indiscernible], we're picking up distribution. And we're finding growth where we can, whether it's the data center sector, which is growing. We have done well with infrastructure, so we are definitely continuing to pick up share in that [indiscernible] business.

Okay. And then as it relates to the emerging markets across the board, it seemed very, very strong. And I know you cited some very specific drivers with engineered solutions, high-performance buildings, et cetera. How do you expect that to evolve? Is it just taking your commercial focus here in the U.S. and overlaying that across the emerging markets is driving that inflection in demand? I'm just curious as to why the strength was so broad-based in the quarter?

Sure. So strategy matters, and I've made this comment before. When I was a new CEO 20 years ago, we developed a strategy of planting a flag in a developed country through a small acquisition. It's a relatively risk-free way of getting into some of these geographies where we did not play. And we did that in a very decentralized basis in an M&A review with our Board 5 or 6 years ago. I think we identified a lot of these small developed country acquisitions is not performing very well. And it happened for a simple reason, we didn't pay attention to them. And the one big exception to that was in South Africa, where of the challenges in that market, we had really a strong team there, really good manufacturing capabilities. So they operated as the RPM of South Africa. And so organically, that business grew from about an $8 million or $10 million business we acquired 20 years ago to what's about a $50 million business today. So we took that knowledge, and we reorganized the developing world approach to what we call the RPM platform approach. Our business is now in the Middle East Africa, India and Southeast Asia, I'll report up through [ Grant Boonzaier ] and his team. They have brought a sharper accounting control perspective a better compliance environment and a real focus on driving growth and improving margins. And it's paying off in the coming years, you're likely to see us expand the breadth and the geography of that RPM platform approach. It's a little big consumer, but mostly a collaboration between the Construction Products Group and the Performance Coatings Group. And you can see the numbers. The underlying profitability is consistent with the regional revenue growth that we're talking about, and we expect that to continue we should be $1 billion plus in the developing world. And so there's a lot of room for us to grow now that we have a better organized, more strategic way to allocate capital into that part of the world.

And our next question will come from Josh Spector with UBS.

I had a couple of follow-ups. First, I wanted to ask on raw materials, just I understand your commentary, and you're pretty explicit on 1Q and 2Q. But as you think about the second half, when you say it's down, are you saying it's sequentially flat in the second half, and year-on-year comparisons are down? Are you saying it's sequentially down in the second half. And just if you could frame, is this guidance reflective of a $90-plus oil environment, or is it reflective of where we were a couple of weeks ago? I know that's probably a harder one to answer, but just curious on your framing.

Sure. This is not the answer maybe you're looking for. I would call it a swag. And it's our best guess as to what might happen in the second half of the year. We did note when there was a couple month period of stability and it felt like the war in the Middle East was coming to a resolution that the underlying primary chemicals that drive a lot of our raw materials decline meaningfully. They're starting to inch back up. And so it's really in anticipation of a level of stability relative to geopolitical issues that should deliver improving raw materials. But who knows? And it's not a very good answer. But with FIFO accounting and with some backlog that we can see in certain of our businesses, but certainly not all of them, I think we have fairly good insight into what's coming in the next 2 to 3 months, other than a sophisticated guess about the future, not much 6 or 9 months from now. We did experience and anticipated improvement in raw materials, but as I said earlier, we seem to be in an environment where stability is not going to hang around for a while. And so I think that's the world in which we anticipate living in '27. The good news is it's a world in which we live in '26, and we focused on what we could control and deliver pretty decent results.

Yes. No, I appreciate all that. I guess I want to try again just like second half, are you assuming it's sequentially stable from peak inflation and your pricing for that? Or do your gross margin assumptions assume costs come down?

We would expect still to see year-over-year inflation in the second half of the year. It will just be at a more moderate pace than what we're seeing in Q1 and Q2.

And as I mentioned earlier, you'll see some of the headwinds that we had in our conversion costs moderate relative to actually operating company distribution centers in Europe, completing some of the plant closures that we've been working on for the last couple of years. So there will be some pickup in the second half of the year that we referenced earlier.

And our next question will come from Matthew DeYoe with Bank of America.

I want to drill on a little bit on consumer for the quarter. So EBIT up pretty modestly on a pretty large top line number. So what are the primary takes? And I guess in my -- I would have thought SG&A savings would have accrued nicely to consumer. Is that not necessarily the case yet? And as you look through like organic growth for the year, I know you had mentioned some stabilization, but not much in the way of reflection. But how does operating leverage progress for that business? And can you talk through, I guess, some of the things you're doing to try to drive growth in...

So the $100 million SG&A expense reduction across the board, slightly less than that impacted our consumer segment. And so you should see the benefits of that as we get into fiscal '27. We have taken significant actions to improve our fill rates, our flow-through in our plants. And so there's a lot of map initiatives that have benefited the manufacturing efficiency of our consumer business. But as we have said in the past, those don't show up until we sell more. And we had another quarter in which while through acquisitions and price. We had positive sales growth in the Consumer segment. Unit volume growth in the quarter was down low single digits. So we continue to be challenged as is everybody in this space by a weak consumer takeaway. Hopefully, we've kind of hit bottom there after 2 years of pretty steady declines. And it feels that way we'll see as things progress into the new fiscal year. But we are poised to put unit volume growth on our bottom line in our consumer business is better than we ever have been.

One other thing I'll add there, Matt, is if you look at our improvements in working capital efficiency and reducing inventory, consumer group has worked really hard to do that. So that leads to some temporary under-absorption at our businesses, but overall, it's a positive for cash flow.

I might have missed this, and I apologize if that was the case, but it felt like a lot of the actions you've taken on the $75 million, in particular, were right out of the gate Jan 1. So was there any real tailwind to fiscal '27 -- sorry, sorry, fiscal 4Q? Or was there a headwind because you were laying people off and there was severance, like how how did that ultimately play out for the fourth quarter? Or is that really just a 2027 kind of fiscal '27 tailwind?

So we benefited in the fourth quarter to the tune of about $20 million. And so it was announced in middle of January, really took effect for about 1 month of Q3. And the follow-on, which has now been completed is maybe 1/3 of it was in geographies outside of the United States. And those take longer to communicate and execute relative to different laws in different European countries. And so that's how it played out. So about $20 million benefit in Q4 and a follow-on $75 million benefit for all of fiscal '27. One comment on that as well as we talked a lot about inflation and mostly focused on raw materials. I would anticipate wage inflation, salary inflation, benefits inflation to be down from fiscal '26, but it will still be up in the 3% to 4% range.

Our next question will come from Frank Mitsch with Fermium Research.

Frank, I appreciate the guidance for fiscal 2027. 3% to 7% top line, 5% to 10% on EBITDA. I'm curious, do you think of this as kind of the new growth algorithm for RPM. And then given in your earlier comments on buybacks, what do you think that implies in terms of the new growth algorithm for RPM on EPS?

I think if we find ourselves in a period of stability, you'll see RPM be able to generate mid-single-digit revenue growth and double-digit earnings growth. And so we are really poised to perform better than we have. And so I would not call what we are projecting here a new growth algorithm. I would call this living in a world of a government that can't stand stability. And so you watch oil prices, you watch credit flows, you watch transportation costs, you watch a new version of the Terawards, and everybody has to adjust. Very proud of how the RPM companies and our associates have dodged and weaved and adjusted in this VUCA environment. And if you can set some frustration in response to your question is there. When we have a couple of months of stability and things seem to be moving in the right direction, you saw it in our third quarter, we can put it on the bottom line really nicely. When we're dealing with the volatility, which seems to be coming again, we will adjust as necessary.

Understood. And congrats to Mr. [ Dense ] on the promotion to President and COO, I'm wondering what that might imply in terms of a step-up to your current positions?

Sure. Well, it implies bringing one of our top operating leaders to help develop our next strategic plan, which is really implicating more strategy around sales and marketing and collaboration around the globe. [ Dave Benstead ] was one of the primary architects of this platform approach that's really driving our overperformance or significant performance in the developing world. He and Paul Hoogenboom runs our construction products were the primary collaborators done that. He's been with us a little more than 25 years as worked in Europe, the Middle East, was the Group President of our Performance Coatings Group and is bringing those skills and that energy into corporate leadership as well. So I'm excited for Dave and look forward to working with him for the next couple of years.

And our next question will come from David Begleiter with Deutsche Bank.

Frank, just on pricing, sorry if I missed this, but how much will you retain if and when raw material costs come back down?

So typically, we retain 100% of the price we put forward given the strength of our brands. As I had commented earlier, the weakness and basically the lack of leverage in Q1 and in Q2 as a result of our ability generally to gain -- to cover price dollar for dollar and then hold on to that price as raw materials revert back to norm, and we can recover margin in that environment. There's rare exceptions to that, for example, silicone, which we're not primary in. So we have silicon in some of our [ DAP ] construction products and some of our [indiscernible] products. And as silicone prices go up dramatically, we pass on price and if silicone prices dropped dramatically that we need to adjust. So with a few exceptions like that, we generally are able to hang on to that price. There was an earlier question about surcharges. Those are temporary. Most of the surcharges are associated with freight costs.

Very good. And just back on consumer, volumes are down about 4% in fiscal '26, which brands or products or groups were actually up or above that metric and which were lower. I presume Pink Stuff was either -- was up year-over-year, is that fair?

No, Pink Stuff was down somewhat year-over-year, given some adjustments and reorganization that we're doing there to position it broadly across our consumer business. We're excited about that. It's the only global brand that we have in the cleaners category. And so we'll have good news to talk about in terms of our cleaner categories as we get into fiscal '27. DAP performed better than our Australian business because they have a heavier weighing towards the pro. And so we saw positive revenue growth out of our DAP business, their Cox and sealants, their phone products, products generally used by contractors, whereas Rust-Oleum is more heavily weighted towards DIY consumption. And as we've talked about, the DIY markets have been flat to down pretty consistently month by month for the last 2 years.

And our next question will come from Abigail Eberts with Wells Fargo.

Congratulations on the great quarter. I just wanted to push further on the growth that you're seeing across CBG and PCG. How much growth are you saying -- are you seeing from data centers compared to your energy and infrastructure projects? And then looking further ahead, there's some very large estimates for data center construction spend and seeing something like $4 trillion between 2026 and 2030. Realistically, what size of the slice of the pie would go to RPM in that scenario?

Yes, Abigail. So this is Matt. If you look at those two businesses, I think it's really important to remember that 2/3 of what they do is maintenance and restoration. So that is a key reason that they've been able to outperform in this market. But when it comes to new growth categories, data centers are clearly at the top of the list. And if you look at RPM overall, it's about 1% to 2% of our business, and it's been growing clearly above the average there. And again, as we talked about, selling systems and being able to warranty that and to save on construction labor because that's what data centers care about, we're able to win more jobs and win a higher percentage of the project spend. So that remains a good category for us. And then in terms of infrastructure, infrastructure has been solid. It's been solid for a few years, and we really do well in this category. And so we would expect that to continue. And including the energy build-out, we've done different projects like in our Protective Coatings with our Carboline business and [indiscernible] chemical, they provide some of the concrete admixtures and construction products for those. So those are two categories, and we expect those to remain positive as you go through FY '27.

So more specifically by product line. In our Construction Products Group, it's the [indiscernible] chemical business that has the biggest exposure to the data centers. You can see that in our comments about admixture strength for us. And then our Performance Coatings Group, our Fibergrate FRP grading business does a really nice chunk of business in data centers for grading for trench covers and for a lot of different things that are needed as data centers are built as well as our Carboline Coatings business where corrosion control and fireproof coatings for structural steel.

Our next question will come from Kevin McCarthy with Vertical Research Partners.

Just a follow-up on the data center discussion. We've been talking about it as a source of strength for quite a few quarters now. As you look at the project backlog for CPG and PCG, do you think that the data center activity is still accelerating? Or is it starting to decelerate given how strong it's already been or an even keel, how would you characterize that?

I think it feels like it's even keel, and I don't want to overstate the impact of data centers on our results. As Matt said, we're doing a lot of business, for instance, the Construction Products Group across hospital systems, schools, the traditional markets where we do maintenance and repair and restoration. And so certainly, it's additive and it's a new area, and we see it continuing as is. But again, not to [indiscernible] its impact on our results.

Understood. And then secondly, perhaps for Rusty, would you comment on your capital expenditure budget for fiscal 2027? And any larger projects we should be keeping in mind there? And also welcome any other cash flow-related prognostications that you may have on working capital or any other extraordinary items that you can foresee?

Yes. Thanks, Kevin. Yes, we anticipate capital expenditures to be roughly in line with what you saw in fiscal '26 and '25, probably in that $220 million plus to $240 million range. And in terms of projects, we are completing a shared RPM plant in India, which will generate a lot of growth for RPM, one of our highest growth regions, again, under the successful platform model that Frank spoke to earlier. So I think that's probably the most exciting project site. And we also, as we've talked about before, are going to be producing Nudura in the U.K. So we have some capital there as well. And then on cash flow, we're going to continue to make progress on working capital like we have, so we anticipate to keep that positive trend going.

Our next question will come from Eric Boyes with Evercore.

First one on the fiscal year guide and understand the transition to EBITDA guidance given acquisitions, I think D&A has been growing double digits. So can you just confirm what the 5% to 10% EBITDA guide equates to for EBIT growth? Is that 4% to 9%, 3% to 8%? And then does the fiscal year '27 guide include most of MAP 3.0 or just kind of the $75 million down payment you've mentioned?

Yes. So as far as the EBITDA and the D&A goes, yes, the D&A has been rising with capital expenditures, Eric. The two metrics are pretty much in line with each other. I mean, if EBITDA is up mid-single digits and EBIT will be up in that same range.

And I think one of the drivers of the change is really feedback from analysts. All of our peers report adjusted EBITDA and many of our analysts worked to try and reconcile our numbers that were published back to an EBITDA to make comparisons easier. And so we thought we should get in line to do the work for you. So it won't impact us, except in the instance of some sizable acquisition in the future.

Okay. I appreciate that. And then for my second, is price catch-up tracking to make fiscal 2Q kind of dollar neutral as well? Or does that go slightly negative as we work through the 6% to 8% inflation as that flows through? Because I mean, our mass kind of shows that 3% to 4% price in fiscal 2Q could get to dollar neutral, which seems reasonable relative to the 2% you mentioned for fiscal 4Q. Does that check?

Yes, that sounds reasonable, Eric. As like Frank mentioned, we've already announced some price increases that will go into effect later this summer. So there'll be a little bit of benefit in Q1, but you'll see more of that pricing benefit flow through in the second quarter. which corresponds with an incremental step-up in inflation.

Our next question will come from Arun Viswanathan with RBC Capital Markets.

So my question, I guess, I have two. Maybe I'll try the operating leverage question again. I think in the past, you had guided to 13% -- or sorry, 16% EBIT margins. You're running at about a 13% clip right now for fiscal '26. So do you still have line of sight for maybe 300 basis points of operating margin expansion, whether it be EBIT or EBITDA? And what would drive that? Is it really -- do you really require some more volume in consumer and potentially CPG to come back? Or could you do that through map savings and maybe some moderation in the health care and other savings as well.

So yes, we do have line of sight to meaningful margin improvement in the coming years. We'll provide more detail on that at our November 9 investor meeting. And yes, it will require a return to unit volume growth in our consumer business and a continuing maintenance of the strength that we're demonstrating in Construction Products and Performance Coatings. And lastly, per my earlier comments, a period of time that seems a little more stable than what we've experienced over the last couple of years. And quite honestly, what we anticipate again fiscal '27.

Got it. That's helpful. And then just on capital allocation here. You mentioned continued kind of bolt-ons. Would that kind of -- would you be in a position to maybe expand that to larger acquisitions if the right opportunity came up? Is that something you're also considering given now that you've kind of got the house in order a little bit, and you've maybe integrated some of the back office functions. Would that maybe position you to pursue larger acquisitions as well, or is it still -- the focus is going to be on smaller bolt-ons?

Sure. Our balance sheet, credit metrics and our cash flow would allow us to do larger transactions. And so we're certainly attuned to that. But we will, as always, be very focused on strategic fit, relative value and return. And so we are positioned to do either more and/or bigger transactions, but they will continue to be kind of the disciplined strategic fits that we've done for many years.

Our next question will come from Jeff Zekauskas with JPMorgan.

I think I want to start off with a question for Rusty. Your prepaid expenses were up about $100 million year-over-year to $423 million. Can those come back down in fiscal 2027 back to the low 300s. And your accounts payable sequentially went up $180 million, which is unusual for you. Are your -- do you think you can keep your days payables at this sort of level, or do they have to come down?

Sure, Jeff. I'll start with accounts payable. As you know, back with MAP 2020, which we introduced 8 years ago, we formed a central procurement team, and they've done a great job over time negotiating better terms with our suppliers. We also use, as you see in our SEC filings, a little bit of supply chain finance and mechanisms as well. But yes, I think you'll continue to see progress in accounts payable. Yes, those are definitely representing sustained progress. And then as far as prepaid goes, we do have different income tax accounts, our marketable securities, assets held for sale. So that can be somewhat volatile, especially based on our tax position. So I wouldn't read too much into trends and prepays.

Okay. And then my second question is for Frank. Interest rates have moved up both mortgage rates, the 10-year rate. When you see that does that make you more conservative in your outlook? Or do you view RPM as really not so interest rate sensitive. And how might these trends affect the Roofing business?

Sure. I don't feel that we're very interest rate sensitive to a point, obviously, if things get extreme, they'll impact everybody. But in our construction products or Performance Coatings businesses, and you see that it's things that Matt emphasizes his investor decks about the restoration and repair maintenance aspect of our businesses. And I think that will continue to play out in fiscal '27 and beyond. Interest rates, particularly how they impact mortgage rates and housing turnover clearly impacts our consumer business. And it's been one of the drags on our consumer business for the last couple of years. We continue at housing turnover at 30- or 40-year lows. And as we've commented in the past, we benefit when a homeowner prepares their home for sale. And when then a new homeowner takes possession and at home and then redecorates it. And so interest rates do have a meaningful impact on activity in our consumer segment, not so much in the others.

[Operator Instructions] Our next question will come from Vincent Andrews with Morgan Stanley.

Mr. Andrews, perhaps your line is muted.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Frank Sullivan for any closing remarks.

Thank you, Cal. With a May 31 fiscal year-end, it allows RPM to celebrate New Year's twice. So we conclude this call with thanking all of you for your participation, recognizing the tremendous success and perseverance of the RPM associates of delivering another year of record sales and earnings results in a very volatile environment and wishing all of you a happy RPM New Year. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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.