RPM International Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 4, 2023

There are 18 speakers on the call.

Operator

Good morning, and welcome to the RPM International Fiscal First Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Senior Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Andrea, and welcome to RPM International's conference call for the fiscal 2024 Q1. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chairman and CEO Rusty Gordon, Vice President and Chief Financial Officer And Michael LaRoche, Vice President, Controller and Chief Accounting Officer. This call is also being webcast and can be accessed live or replayed on the RPM website 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.

Speaker 1

For more information on these risks and uncertainties, Please review RPM's reports filed with the SEC. During this conference call, references may be made to non GAAP financial measures. To assist you in understanding these non GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments will be on an as adjusted basis and all comparisons are to the Q1 of fiscal 2023, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call.

Speaker 1

It can be accessed in the Presentation and Webcast section of the RPM website at www rpminc.com. Additionally, as we discussed on our most recent earnings call, certain businesses in Asia Pacific that were previously part of the Construction Products are now being managed and reported under the Performance Coatings Group effective June 1, 2023. As a result, All references to CPG and PCG today reflect the updated structure. The recast businesses generate approximately $100,000,000 in annual sales This change has no impact on consolidated results. At this time, I would like to turn the call over to Frank.

Speaker 2

Thank you, Matt, and thank you to everyone for joining us on our call today. I'll begin today's call with an overview of our Q1 performance, And then I'll turn the call over to Mike LaRoche to discuss financials in more detail. Then Matt Schlar will provide an update on one of our businesses and then Rusty Gordon, our CFO will Our outlook for the next quarter and the balance of fiscal 2024. At the conclusion of the prepared remarks, we'll be pleased to answer your questions. Beginning on Slide 3 of our investor deck, our associates are to put it simply executing at a very high level.

Speaker 2

We generated 4.1 percent sales growth in what can be best described as a mixed economic environment, resulting in record 1st quarter sales. Driven by the continued execution of our MAP 20 25 initiatives, we expanded margins and grew adjusted EBIT by 12.3% an all time quarterly record. These results represent the 7th consecutive quarter of record sales and adjusted EBIT. Importantly, we remain focused on converting this profitability into cash flow and this focus resulted And $359,200,000 of cash generated from our operating activities during the quarter which is an all time record. Moving to Slide 4, sales were driven by pricing mainly from the wraparound effect of increases implemented In fiscal 2023 and strong unit volume growth in our Construction Products Group.

Speaker 2

Our CPG was our fastest growing segment As the team there leverage its strategic focus on repair and maintenance and differentiated turnkey service model. As we've highlighted in the past, several of our businesses in our Performance Coatings Group and Construction Products Group have positioned themselves to benefit From spending on infrastructure and reshoring capital projects, which continued during the quarter. The successful Execution of our MAP 2025 initiatives led to margin expansion during the quarter, particularly in businesses where volumes grew As we are able to more fully leverage the structural efficiency improvements that we put into place, MAAT 2025 is a key driver in growing adjusted EBIT to an all time record of $309,000,000 As I mentioned, this growth is in addition to strong results in the prior year and our 2 year stack sales and adjusted EBIT growth rates were 22% 49%, respectively. MAP 20 25 initiatives are also contributing Structural Improvements in Working Capital. Through improved coordination between sales operations, procurement and R and D, As well as being a more data driven decision making organization, we have become more agile with more efficient inventory processes.

Speaker 2

This contributed to strong cash flow conversion during the quarter. And while we still have significant work to do in improving in this area, I'm proud of the progress we are making on a sustainable basis. Looking at sales by geography on Slide 5, Sales growth was strongest in Africa, the Middle East and Latin America driven by continued spending on Infrastructure projects in these emerging markets. This growth is in addition to strong prior year results when sales in these regions were up double digits. Europe is expanding for the first time in over a year, while economic growth in the region remains subdued, Our teams captured growth opportunities and are leveraging MAP 2025 initiatives to expand margins.

Speaker 2

While on the service sales growth in North America may appear moderate, it is important to keep in mind that in the prior year revenues increased in North America nearly 23 The 2 year stack growth rate in North America is 26.1%. Overall, RPM has begun our fiscal year with positive momentum and our teams are executing at a high level on the things that we can control. We remain focused on executing our MAP 20 25 program, leveraging our competitive strengths to capture growth opportunities And bringing new products to market to continue growing throughout the fiscal year. I'd now like to turn the call over to Mike LaRoche to cover our financial results in more detail.

Speaker 3

Thanks, Frank. Starting on Slide 6, consolidated sales increased 4.1% to a 1st quarter record $2,010,000,000 driven by pricing with modest volume growth. Organic sales increased 3.9% With foreign currency translation and acquisitions less divestitures, both contributing 0.1% to sales, Adjusted EBIT grew by 12.3 percent to an all time record of $309,000,000 during the quarter. Gross margin expansion was a driver of this growth led by MAP 20 25 initiatives and improved fixed cost utilization, Particularly at businesses with growing volumes. All segments except consumer generated commodity cycle benefits Because of consumers' raw material basket and in particular TiO2 and Metal Packaging, this segment's raw material inflation has been larger And continued longer than the other segments.

Speaker 3

SG and A as a percentage of sales increased during the quarter driven by growth investments And higher variable compensation expenses due to the improved financial performance. Expense reduction actions were implemented in the 4th quarter helped to offset the SG and A increase. Adjusted EPS grew 11.6 percent to $1.64 And was driven by adjusted EBIT growth. Turning to the segment results on Slide 7. Our Construction Products Group achieved all time record sales of $783,000,000 an increase of 10.8% from the prior year period.

Speaker 3

Organic sales growth was 9.5% With acquisitions contributing 0.6% and foreign currency translation adding 0.7% to sales. Sales growth was led by strength in our restoration systems for roofing, facades and parking structures, which benefited from the segment's strategic focus on repair and maintenance, As well as its differentiated turnkey service model. Concrete admixtures and repair products also helped drive sales growth. After several quarters of sales declines, Europe returned to growth. As expected, new office construction was weak, But stronger demand in other end markets and our strategic focus on repair and maintenance more than offset this softness.

Speaker 3

Adjusted EBIT increased 33 percent to an all time record $145,000,000 led by improved fixed cost leverage and MAP 2025 benefits, Including Commodity Cycle Benefits. As a result of improved financial performance, variable compensation increased And it was partially offset by expense reduction actions put in place at the end of fiscal 2023. Additionally, as we recently announced in the Q2 of fiscal 2024, CPG acquired a wall system fabricator to And its offering in off-site panelized construction. The acquired business has annual sales of approximately $20,000,000 On Slide 8, the Performance Coatings Group achieved record net sales and adjusted EBIT. Revenue increased 4.1% To a record $379,000,000 Organic sales grew 4.0%, acquisitions added 0.8% And foreign currency translation was a 0.7% headwind.

Speaker 3

Sales were driven by strong demand for the segment's flooring and other engineered solutions for infrastructure and reshoring capital projects. Demand was strong internationally and increased pricing also contributed to growth. Adjusted EBIT increased 17.4 percent to an all time record of $59,000,000 The growth was driven by Strong sales and MAP 20 25 benefits led by commercial excellence programs in Europe and included commodity cycle benefits. These results are on top of a strong prior year increase. Part of our MAP 2025 focus on improving profitability in Europe, PCG divested a non core service business there.

Speaker 3

PCG incurred $14,600,000 of charges related to this divested business, Which are excluded from adjusted EBIT. Moving to the next slide, Specialty Products Group sales declined 10.7% to $181,000,000 Organic sales declined 9.0%, divestitures net of acquisitions reduced sales by 2.2% In foreign currency translation was a tailwind of 0.5%. OEM demand was weak during the quarter, Particularly in businesses that serve the residential sector, including coatings for furniture, doors, windows and cabinets. Additionally, SPG sales were negatively impacted by customers holding inventory levels below historical averages, Which is pressuring volumes. The divestiture of the non core furniture warranty business last fiscal year also reduced sales.

Speaker 3

Pricing helped to partially offset some of this weakness. SPG adjusted EBIT declined 39.6% To $18,000,000 The sales decline, product mix and unfavorable fixed cost leverage drove the decline. The divestiture of the non core furniture warranty business also contributed to the adjusted EBIT decline. SG and A as a percentage of sales increased Driven by investments in growth initiatives and unfavorable impact of deleveraging a lower revenue. Expense reduction actions implemented at SPG in Q4 Help to offset this.

Speaker 3

Moving to Slide 10, the consumer group sales increased 1.5% to a 1st quarter record $670,000,000 Organic sales increased 1.7%, foreign currency translation was a headwind of 0.2% And there was no impact from acquisitions. The sales growth was driven by increased pricing, primarily due to the large increase instituted during the first In response to inflation. Inflation, although less of a headwind, still persisted for the consumer segment in the Q1. As a reminder, consumer faced a challenging prior year comparison as sales surged 22.5% In the Q1 of 2023, when it began restocking retailers after raw material availability improved. Volumes declined moderately driven by reduced customer takeaway and certain customers holding inventory levels below historical averages.

Speaker 3

Share gains helped to partially offset these volume pressures. Adjusted EBIT increased 3.5 percent to $121,000,000 Driven by MAP 2025 benefits and the sales increase. Cost inflation continued in the quarter and was a headwind to adjusted EBIT As was lower fixed cost utilization as we slowed production to normalize inventories. We also received a $10,300,000 business interrupt Insurance reimbursement during the Q1 and the gain associated with this reimbursement has been excluded from adjusted EBIT. Now I'd like to turn the call over to Matt to go over the balance sheet and cash flow and provide a business update.

Speaker 1

Thank you, Mike. Moving to Slide 11, The progress we made improving working capital during the Q4 continued in the Q1, driven by our inventory normalization actions and MAP 2025 structurally improved working capital, inventories declined by $223,000,000 compared to the Q1 of 2023. Working capital management and strong profitability growth resulted in an all time record cash flow from operating activities of $359,000,000 compared to $24,000,000 in the prior year. This enabled us to return $54,000,000 to shareholders through dividends in the Q1. We have continued our share repurchase program and have bought back $25,000,000 of shares from the beginning of the fiscal year through the end of September.

Speaker 1

We also reduced debt by $178,000,000 during the quarter. Now turning to Slide 12, we'd like to provide an update on PureAir, The indoor quality and HVAC service business that CPG acquired in fiscal 2022. Pure Air provides turnkey solutions to address indoor Air quality and HVAC performance issues. These include environmental consulting, building diagnostics and HVAC system cleaning and restoration. As commercial HVAC systems age, they can become dirty and worn down, resulting in reduced performance, efficiency and air quality.

Speaker 1

These issues negatively impact all buildings, but can become critical problems in places like hospitals and schools, which are key end markets for CPG. Peoria's turnkey solutions address these challenges and offer building owners the possibility of restoring their HVAC equipment Instead of replacing it, resulting in significant savings and reduced disruption to the building's occupants. PureAir expands CPG's role as a partner to building owners, Offering products and services focused on the repair, maintenance and restoration of all six sides of a building, We are optimistic about its future. Now I'd like to turn the call over to Rusty to cover the outlook.

Speaker 4

Thanks, Matt. Our outlook for the Q2 is on Slide 13. Many of the trends we experienced in the Q1 are MAP 2025, including the commodity cycle, infrastructure and reshoring demand, Reduced destocking and resilient demand for repair and maintenance. As a reminder, some of our MAP Seasonally lower volume quarters of Q2 and Q3 and higher and stronger volume quarters Q4 and Q1. Some of the challenges we expect to face in the Q2 are continued weakness In OEM demand, softness in some new construction end markets and a reduced benefit from pricing, Although pricing is still expected to be positive, we also face challenging comparisons to the prior year When sales grew 9% and adjusted EBIT increased by 36%.

Speaker 4

Taking all of this into account, we are forecasting sales to increase in the low single digit range on a consolidated basis, Led by CPG and PCG with Specialty still showing declines. We expect adjusted EBIT margins to expand and to generate consolidated adjusted EBIT growth Of high single digits to low double digits. Moving to Slide 14. Turning to our full year outlook, we still expect modest economic growth. Despite the soft macro backdrop, We are focused on leveraging the growth drivers we control, including number 1, MAP 2025 Number 2, our strong position serving infrastructure and reassuring demand with our engineered solutions.

Speaker 4

And number 3, our strategic focus on repair and maintenance. We also continue to expect to benefit from reduced inflation, reduced destocking and easier comparison in the second half of the year. As was the case last quarter, we anticipate weakness in certain new construction markets Throughout the year and weakness in OEM demand at least in the first half of the year. Our current outlook for 2024 on a consolidated basis remains unchanged. Sales are expected to increase in the mid Single digit range with adjusted EBIT growing in the low double digit to mid teen range.

Speaker 4

This concludes our prepared remarks. We are now pleased to answer your questions.

Operator

We will now begin the question and answer session. And our first question comes from Mike Harrison of Seaport Research Partners. Please go ahead.

Speaker 2

Good morning, Mike.

Speaker 5

Hi, good morning. Congrats on a nice start to the year.

Speaker 2

Thank you.

Speaker 5

It seems like the construction business was pretty strong across the board. Just curious where Are you expecting to see momentum continue? Where could we potentially see some choppiness? And can you break down the 9.5% Again, a growth between volume and pricing.

Speaker 2

Sure. So Boy, 2 thirds to 3 quarters of their growth in the quarter was unit volume growth and it was pretty strong At the Tremco Roofing WTI Business, at our Tremco sealant business, Euclid, And then broadly, and this is mostly our Construction Products Group and our Performance Coatings Group In the Southern Hemisphere Developing Countries. And so real good strength there. In many instances, we're bucking trends. As we talked about in the past, we've had a real focused effort on investing in growth initiatives and One of the real starts this year is something that in this quarter that Matt talked about, which is PureAir, which is finally Gaining some traction after its 1st year, which we got off to a slow start, had to integrate it into WTI and into our roofing Sales force and it's going very well.

Speaker 2

So that's one example of some of the very specific initiatives We're investing in it's starting to pay off that's I think allowing us to buck some of the trends in the construction markets.

Speaker 5

All right. And then over on the Specialty business, you mentioned that you're seeing weak demand From OEM customers and it seems like that's going to continue into the November quarter. But any thoughts on what That business looks like once it stabilizes, maybe talk a little bit about your longer term growth and margin expectations for that Specialty segment?

Speaker 2

Sure. So the biggest impact there is housing. We do a lot of wood stains and finishes into Furniture and to windows and doors, kitchen cabinets. And so, notwithstanding the inventory mismatch For demand, particularly in this higher interest rate environment, the North American housing market, U. S.

Speaker 2

Housing market is weak and continues to be weak and that's hurt us. Some other categories that they have been strong in, including manufactured housing and or RVs, And those are weak after the post COVID bump. All that notwithstanding, we have some very targeted Initiatives in our COPCO and adjuvant business, there's some patented products there that allow for a significant reduction in the use of herbicides Pesticides, we believe in long term benefit of that business and we're investing in that. We're investing in an Expanding MRO channel for our Alleged Brands business that should take out some of the storm related cyclicality. Those are just a few examples.

Speaker 2

And the one thing that the lower volume is hiding is some significant MAP 20 25 improvements In our Specialty Products group, but as Rusty highlighted, most of these improvements On the manufacturing floor and or cost price mix items and with improved conversion cost, Better handle on mix. Those benefits only show up when we sell something. And so the lower volume is hiding, I think the good efforts in our Specialty Products Group folks have made along with the rest of RPM and executing on the map 25 initiative.

Speaker 6

All right. Thank you very much.

Speaker 2

Thanks, Mike.

Operator

The next question comes from Ghansham Panjabi of Baird. Please go ahead.

Speaker 2

Good morning, Ghansham. Good

Speaker 7

Call. I guess as a follow-up to

Speaker 8

the last question on construction and the margin improvement that you saw there. Frank, you alluded to several factors, fixed cost improvements, raw materials, MAP savings, etcetera. How would you have us think about Those dynamics from a stack rank standpoint in terms of the margin bridge year over year?

Speaker 2

Could you repeat that? I'm not sure I understand the question, Got you.

Speaker 8

Yes. So the margin improvement in CPG, I think was up 3 10 basis Year over year, just the main drivers as it relates to that?

Speaker 2

So I think the main drivers are MAP 25 initiatives where we're seeing improvement in conversion costs. I mentioned this what we call D3 initiative at RPM and standard Driven decision making. So we are much better today at driving mix on a going forward basis And that's helping us. We are benefiting in the quarter from the commodity cycle Disinflation that we're starting to benefit in a few places, construction products is certainly one of those. And then it really is very focused Efforts in strategic initiatives around repair and maintenance.

Speaker 2

So we're seeing real strong results in our core roofing business. All of that as you we're 95% reroofing and repair on existing roofs, not new construction. PureAir has been very strong and we expect that to continue. We'll see tens of 1,000,000 of dollars of new volume from that initiative. Panelization is something we've been working on for the last 3 or 4 years.

Speaker 2

We just added a significant piece of that with this Texas acquisition we announced In this past week. So it's really focusing on the things that we can control that tend to be in the large repair and maintenance areas.

Speaker 9

The last

Speaker 2

comment I'll make is that hospitals have been a significant market for us And we had some booming business there during and coming out of COVID. Last year was not a good spending year for that sector. And so that weighed on our performance in fiscal 'twenty three and we're seeing some pickup on a relative basis there And also some pickup on Nudura, which had a challenge 'twenty three because of what's happening in the residential market. But again, a very focused effort on expanding The understanding and the specifications for the Nudura ICF system. So again, it's a lot of self help and a lot of very deliberate spending into specific initiatives across RPM and you're seeing the results of that spending Best impacting our Construction Products Group as we sit here today.

Speaker 8

Yes, perfect. Thank you for that, Frank. And then just in terms of the balance sheet, where do you expect the balance sheet to sort of end up At the end of the fiscal year 'twenty four on a net debt to EBITDA basis. And just related to that, how are you thinking about capital allocation in terms of in context of where interest rates are and Ali, the macroeconomic uncertainty and I guess I'm referring specifically to your appetite for incremental acquisitions.

Speaker 2

Sure. Great question. And So let me step back big picture and kind of just address simply what are we trying to do with this MAP program. And it's really two things. We're trying to significantly improve our cash conversion cycle and it's working and we're trying to Be more data driven in our decision making with a real focus on investing in specific organic growth initiatives And you're seeing that work, particularly in our construction products group.

Speaker 2

And so what that looks like is Record 4th quarter cash from operations followed by record 1st quarter cash from operations, Notwithstanding a handful of acquisitions and maybe $25,000,000 or so of what did we acquire Rusty last year and Share repurchases.

Speaker 4

Why is there we did $50,000,000 $50,000,000

Speaker 2

in share repurchases. Year over year, we reduced that by $332,000,000 And so that focus on cash conversion is really working. We expect that those improvements to continue. And so that's big picture what we're trying to do. The volatility that we've all experienced over the last few years is continuing.

Speaker 2

And so as we work with our Board, I think we'll have a better answer in the coming quarters Gansham about How we think about capital allocation. But as we sit here today, The M and A market is relatively slow. We will continue to execute on good strategic small to medium sized deals. But the days of huge multiples in my opinion are over if not forever at least temporarily. We went through a period of time where Incremental cost of capital was almost 0.

Speaker 2

That is not true today. And so given the choppiness in the markets And the MAP initiatives that are benefiting our conversion costs and our efficiency, we are focusing a lot of time and Tension on driving organic growth where we can. It's easier said than done in an economic environment that As Rusty likes to say, feels like a rolling recession, both geographically and across sectors. Understood. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from John McNulty of BMO Capital Markets. Please go ahead.

Speaker 2

Good morning, Glenn.

Speaker 10

Good morning. Thanks for taking my question. So I guess the first one would just be on raw materials. Your previous destocking over the last few quarters that you guys were implementing and FIFO makes It's a little bit complicated to kind of think about how raws are really trending for you. So I guess can you help us to think about it looks like you got some improvement in the 1st quarter, how should we think about that continuing to flow through in terms of deflation throughout the rest of And has the move in oil recently, has that had any impact upward on some of the raw trends that you pay attention to, how should we be thinking about that?

Speaker 2

Sure. I'll address your last portion of your question first. The only place where we're seeing the move in oil prices impact us immediately is an acetone. That's It impacts a number of our coatings businesses, but in particular Rust Oleum. So in general, as you followed RPM for many years, we in our industry follow the commodity cycle Increases up with lagging price increases and so you see some margin compression and then as the commodity cycle cycles down, We typically pick up the loss margin.

Speaker 2

We are now experiencing that in Q1 in most of our businesses and segments Except consumer, we would expect to begin to see that in consumer in Q2. We're rounding Metal Packaging increases that were pretty extreme and are paying attention to some tariff activity Relative to tinplate, which is the primary raw material for metal packaging and spray cans, things like that, TiO2 is up modestly year over year and acetone is the only raw material that we see reacting to current price increases. So The commodity cycle benefited us particularly in our Construction Products and Performance Coatings segment In Q1, we would expect it to continue to be a benefit to margin expansion in Q2 as well. Again, that's another one of those things that is volume driven. You get the benefit when you sell something.

Speaker 10

Got it. Okay. No, fair enough. And then maybe just on the consumer segment. So you spoke to, it sounds like some of your customers are Drawing down inventory kind of below normal levels, I guess can you help us to think about if that's largely played out at this point Or if there's still a disconnect in terms of the point of sales and what you're seeing in terms of pull?

Speaker 10

And then I guess maybe as an Add on to that, you mentioned some share gains, I guess, can you speak to those as well?

Speaker 2

Sure. So Our consumer segment is continuing to perform I think at a good level. I think most of the inventory adjustments are They were certainly significant in the last year. I will tell you in terms of consumer takeaway, While it is improved, meaning less negative, it still trends across different product categories and different channels in the kind of Lowtomidnegativerange, which is a slight improvement from what we experienced in the second half of last year, which was kind of solidly Mid to upper single digit negative consumer takeaway. Some of that's hangover from the COVID bump.

Speaker 2

As we had communicated in the past, we had lost some share to major big box account. Some of that was related to our own supply challenges. Our supply challenges are over. Our fill rates are back to solid numbers. Through the MAV initiative, we have created through efficiencies, 40,000,000 or 50,000,000 Units of volume and so we're in really good shape today there.

Speaker 2

And product gains have been With our Universal, we're picking up share in new accounts and that's going really well. The Rust Oleum 5 in-one spray is showing some incremental gains and I say incremental, any positive numbers in the face of Slightly negative consumer takeaway, look good. We've got some new product introductions at DAB, A 2 component spray foam and one can that's being introduced really well, as well as A textured spray that's being well received. So new product introductions are going well and we actually Experience because of the new product introductions, some positive unifying growth in the quarter at DAP. And so that's kind of the broad overview of what's happening in

Operator

The next question comes from Stephen Byrne of Bank of America Securities. Please go ahead.

Speaker 2

Good morning, Steve.

Speaker 11

Good morning, Frank. I've got a question for you on CPG. Do you have a view as to how much of the revenue in that Segment is generated from service versus selling materials And that could be a complicated question given your some turnkey projects. But I ask about this service component because it seems as if it's something that you're expanding into This PureAir model seems to be service and your restoration and maintenance on roofing seems to be There is a service revenue component. And just wondering if you had an estimate on that and maybe more importantly, Would you see that model potentially expanding into other areas of service such as Cleaning or water treatment, something beyond The air quality inside the building?

Speaker 2

Sure. So great question and in general, our Construction Products Group revenues are about 30%, maybe slightly higher 30% service revenues With roughly 70% driven by product sales, it's a little bit There's a little ambiguity there because in most instances we're not selling. In some cases we sell only repair services or other services, But in many instances, those services go hand in glove with the material sale for a reroofing project, for instance. I would expect that over time to And we talked about PureAir, that's a good example. That addresses right at indoor air quality And we have been asked for many, many years as we're on the roof with our WTI Services Group And addressing issues on the roof and not just roofing materials, but rooftop safety in terms of the work that Tremco does with fiber grade in terms of railings and walkways.

Speaker 2

We've been asked for many years, can we address HVAC Issues in repair and the answer for too long was no. 2 years ago, we acquired Pure Air And there's a key element of this that took us a while to fix. And that is a service business Whereby we do an assessment of existing HVAC systems and then have really good capabilities to clean, disinfect And repair components. And it was a $20,000,000 business when we acquired it. We expect a few tens of 1,000,000 of dollars Of revenue growth this year and the potential for that is meaningfully higher.

Speaker 2

And so as that grows as a share of our business that will Grow that 30% services business higher. The benefits are basically about a 1 third cost Versus total replacement, the immediate benefits are significant improvement Inefficiency of an old system that's getting worn down because of blades or motors or other things. And there is a measurable Benefit immediately in indoor air quality. And so for the hospitals and school system customers That our Construction Products Group serve, it's a really exciting market for us.

Speaker 11

And Frank, any thoughts about expanding some of that service to go into other issues such as cleaning services, for example, or water?

Speaker 2

Yes. I think the expansion will come from our continued market share gains broadly roofing. But the areas that will expand like a pure air are where we can add value. So we can add significant value versus Placement, and so we'll look for other opportunities, but they'll be limited to areas Where we can truly add value as opposed to areas that are more commodity like in services. And I think it's critical and it's back to that component of it's not just the service, but it's adding the material element or the cleaning or disinfecting or Blade repair components that go along with it.

Speaker 2

One other factor which is also true for our Stoneheart Flooring business And the reason that we got off to a rough start in the 1st year of PureAir was staffing. I think anybody that is doing any work in residential or commercial and industrial Construction workforce issues are significant. We have solved that issue with Pure Air with our WTI Roofing Workforce, we have a great collection of installers with our Stoneheart business. And so That certainty of having our people on the job on time staying on the job to get it done And this environment is also getting us a competitive advantage in the roofing and the HVAC restoration and in the industrial flooring markets.

Speaker 11

Okay. Thank you, Frank. And one quick one on Nudura. Do you see the value proposition Of that product to be more in its insulation value, thus either cold or hot climates Or more for its hurricane tornado protective value and how are you marketing that product based on those Those two value propositions.

Speaker 2

So the simple answer to that is, yes. It's one of the most energy efficient building systems for residential and commercial structures on the market today. It's got its unique characteristics that we continue to have to educate people on, but it's also One of the most durable residential and commercial structures today. So for instance, we got approval for Nudura Specifications for schools in Kentucky and that was in part a direct result of a terrible experience they had With a tornado a few years ago, the durability of Nudura in hurricanes is also becoming well known. And so it's a combination of the energy efficiency for people that are looking for net zero buildings.

Speaker 2

We completed the 1st net zero Pool in Kentucky a year ago, it's not just the new Dura piece, it's other building components, but So we can deliver that and the durability in the face of expectations for more climate driven Weather events.

Speaker 11

Thank you.

Operator

The next question comes from Josh Spector of UBS. Please go ahead.

Speaker 2

Good morning, Josh.

Speaker 9

Hey, good morning, Frank. So thanks for taking my question. I wanted to ask on group pricing overall and maybe if you can drill into the segments a little More beyond construction. I guess based on what you've given, I mean it seems like price was up 3.5 ish percent. Our math at least is on a stack Versus a few years ago, second half last year, you're tracking about 30% pricing multiyear stack.

Speaker 9

This quarter implies maybe about mid-20s. I'm not sure if those numbers are right with your thinking that there has been a step down sequentially or not. And just curious How you think pricing would trend in the various segments based on that information through the rest of the year?

Speaker 2

Sure. And we don't provide That detail by segment, but on a consolidated basis, we're in a 3.5% range. So across our businesses, you're seeing price impact in the quarter that might be as low as 1.5%, it might be as high as 5%, Depending, it's really not by segment, it's by product line and really driven by raw material issues. But on a consolidated basis, We're about 3.5% price in the quarter.

Speaker 9

Okay, thanks. I mean, I guess the crux of my question more is, Is there any sequential step down in pricing in any of the segments or is that math maybe incorrect?

Speaker 2

No, I think that's correct. I mean, again, we've been fighting and it's not unique to us or all industry For that matter, most manufacturing, a commodity cycle that's bigger than any of us have ever seen. Over a 2 year period, we saw more than $500,000,000 of raw material price impacts in our consumer business. And so it took us a long time to get on top of that. And I can tell you the other aspect of it and this is something that I said in the spring of 'twenty two And we were early.

Speaker 2

We were starting to see inflation

Speaker 3

throughout our

Speaker 2

whole P and L. And so We've seen inflation which continues while raw material inflation is abating and our related price increases Our stepping down and you can see that with the data I just gave you this quarter. Labor is still an issue. Items like insurance Are a meaningful issue in terms of higher inflation. And so inflation still exists in a number of factors and inflation Still exists because of interest rates in the housing market and I think that's part of the challenges that we're seeing particularly in our specialty products group.

Speaker 9

So I guess, sorry, to clarify one more time. So sequentially, when you're talking about inflation still persisting, Are your pricing moving up sequentially, down sequentially or holding sequentially in terms of how you're thinking about this quarter and your outlook?

Speaker 2

So in the quarter, year over year, we're up 1%.

Speaker 4

In which quarter? This quarter. The Q2? Yes, we're going to lap some anniversaries of selling price increases, Josh. So yes, we would expect marginal Decrease in that 3.5% price effect.

Speaker 2

But it's again, There's a few areas where we've had price increases where it was just necessary to get them that are a little outside of cycle, But we are seeing the impact of price sequentially step down. And so I can't give you the numbers for future quarters other than In this quarter, price increases accounted for about 3.5%, and we would expect that to sequentially slowly bleed out the next couple of quarters. And the things that we're paying attention to are add off once again relative to oil prices and their impact in other areas, Tinley relative to tariff activity that's being pushed in Congress. So there are a couple areas that we're paying attention to, but Nothing that's impacting additional price increases today.

Speaker 7

Okay. Thank you.

Operator

The next question comes from Aleksey Yefremov of KeyBanc. Please go ahead.

Speaker 12

Good morning. Good morning. This is Ryan on for Alexi. So I guess my first question, I understand there's a number of different pockets of Non res, but can you walk us through how demand is kind of trending in each of those markets? And have you seen any signs of slowdown in backlogs In any of those markets?

Speaker 12

Thank you.

Speaker 2

Sure. So there's not too many in the construction markets, there's not too many good Sticks to point to, residential construction is taking it on the chin in North America, which is where we have our primary exposure. Commercial construction is not very strong. You look at the office glut and what's happening there, The build out of the Amazon distribution centers things like that have run their course in terms of the big growth. So there's not a lot of good signs to point to.

Speaker 2

The areas of strength for us Are the things that we talked about very deliberate initiatives around maintenance and repair in the sectors that we have strengthened. And So I think our performance is kind of bucking the underlying trends. And a big part of that is In our Construction Products Group, I would say we have maybe a 30% or 35% Exposure to new construction between residential and commercial, which means we're in the 65% to 70% Less cyclical renovation, repair, reconstruction, reroofing markets. And I think those markets are stable and we're picking up share given some of the new initiatives we have. The other area that the only area that Showing continued strength is related to industrial construction and capital spending driven by the onshore movement and amount of government subsidies in that area.

Speaker 2

And that is impacting Construction Products Group a little bit and our Performance Coatings Group, more.

Speaker 12

Got you. Okay, that's helpful. Thank you. And then just I have A question on your comment in the deck here. In the Specialty Products Group, so you mentioned customers held inventories Hello historical levels.

Speaker 12

I mean, does this mean destocking this business is over and there's been no uptick from restocking? Can you kind of try and parse that out for us? Thank you.

Speaker 2

Sure. I think it's over. I don't know that it would have a much of a big impact going forward. But a good example is Because of supply chain challenges into RVs and What remaining furniture or cabinet making is done, it was very common for those businesses pre COVID To shut down, for instance, in the month of January for maintenance and other things. And during the COVID period and then the post COVID period with Supply chain challenges, those shutdowns disappeared.

Speaker 2

Well, they showed back up in calendar 'twenty three. And so they got back to normal shutdowns. There was inventory adjustments. The other thing that I don't think we've emphasized enough here, most of this is done, but not all of it. But starting in December of last year, Really driven by better data and our map 25 initiatives.

Speaker 2

We very deliberately shut our own production in a number of areas To make some permanent inventory adjustments. And so in the second half of twenty twenty three, we had tens of 1,000,000 of dollars of unabsorbed overhead, Both from lower volumes from a market perspective, but also lower volumes from deliberate decisions to shut down productions in some of our specialty products companies, In our consumer group and other areas to really address some permanent inventory level issues Across RPM, most of that is behind us as well.

Speaker 13

$100,000,000 to $200,000,000 price cost tailwind. Can you talk about how much was the price cost tailwind on dollar basis in Q1? And Then with higher oil prices now and some lingering inflation in consumer, maybe help us understand Your expectation on price cost realization this cycle versus that historical $100,000,000 to $200,000,000 range?

Speaker 2

Sure. So I can give you a big picture. I don't know that we would disclose that by quarter. So big picture in our MAP initiative, we laid out a goal And it was actually a year ago that we went public with the math goals of achieving $465,000,000 worth Savings and about $115,000,000 of that was our expectation of commodity cycle recovery. So non MAP driven initiatives, just the normal commodity cycle recovery.

Speaker 2

Our target this year in MAP savings Is $160,000,000 I would venture that half of that is going to be Commodity rate cycle recovery, depending on Our dynamics and looking at the past, it's possible that we would exceed that 115,000,000 But again, time will tell as the pending quarter's results happen.

Speaker 13

Got it. And then on SG and A, First, can you talk about the investments you're making? And if demand gets worse from here, how much can you pay back From those spendings. And then can you also quantify the year over year headwind on incentive comp on a full year basis?

Speaker 2

Sure. I'll let Rusty address the incentive comp issue and some of it's truly incentive comp, Which is higher based on higher results and better mix and some of it continued inflation in wages and salaries.

Speaker 4

Sure. Yes. In terms of the SG and A for the quarter, David, there is a few areas Compensation, 1 obviously is commissions go up when we sell more especially of higher margin products which We're pushing and you saw that on the gross margin line. Another area would be Performance related bonus accruals were up a few $1,000,000 during the quarter. And then on basic Salary and wage inflation and SG and A, typically Those have run over the long term about 3%.

Speaker 4

They're up more in the 4% to 5% range right now. So as a result of that, pay increases were probably in the $6,000,000 or $7,000,000 range Impacting SG and A.

Speaker 2

And to your the first part of your question, roughly 25% or 30% of the SG and A increase in Q1 was driven by focused, we call them Big Ideas for Growth, BIG, At our businesses, so I can give you a broadly some of the things. These are just directional. But in our Construction Products Group, PureAir, Panelization, Nudura are getting a lot of attention and extra investment. One example in our Performance Coatings segment is a project that we're in our 2nd year called C2B, which is carboline to 1,000,000,000 And there's specific initiatives in Canada, Europe and in non oil and gas segments. In our Specialty Products Group, we are focused on a turnaround of our Day Glo resin and fluorescent color business.

Speaker 2

I mentioned previously the specific investments in the cop coat patented adjuvants, as well as the channel MRO channel focus for Legend Brands, which a new market for them. In consumer, we're very focused on increasing advertising and promotion around some of the new product introductions Daphne Rust Oleum. For the balance of the year, if we follow through with our plans, Probably anywhere from 30% to 40% of SG and A increases would be associated with these specific Initiatives with the intent of driving organic growth. All of these are easy to cut back And I don't say that cavalierly. In some instances, it's hiring more salespeople or tech service people.

Speaker 2

In other areas, it's truly advertising or promotion Digital advertising, but as we sit here today, we think that's penny wise and pound foolish And it is our specific intent to focus some of the MAP savings on these Specific growth investments. And if we're successful, you'll see in the coming year, some more stories like what we're talking about in our construction products Group today, we expect that to continue in CPG for the balance of the year. They got good momentum in these new initiatives. And on the flip side, if we bump into the DB recession in some economists here, There are tens of 1,000,000 of dollars of SG and A that could be cut pretty quickly.

Speaker 13

Got it. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Mike Sison of Wells Fargo. Please go ahead.

Speaker 2

Good morning, Mike.

Speaker 7

Hi. This is Richard on for Mike.

Speaker 10

Hey, Richard.

Speaker 7

Hi. So, yes, first question, you saw strong growth in Europe, Over 9% year over year growth. You did divest 1 non core business, Performance Coatings. So can you give me some color on what end markets were driving the strong growth this quarter in Europe? And should we expect margins to improve somewhat from the divested business?

Speaker 2

Yes. So I think part of the European story is Europe really was negatively impacted By recessionary elements and then the Russian war on Ukraine. And so we experienced a very challenging Performance in Europe in calendar 2022 and most of fiscal 23. And so some of it is we're rounding easier comparisons. The other area is that we are having A more focused effort in the MAT25 initiatives in Europe.

Speaker 2

For instance, our MS168 initiative, which is really Driving lean manufacturing and continuous improvement disciplines across our plants, it's a very in plant, hands on, utilizing outside process, it takes weeks, is followed up by performance audits on a 90 day cycle. That got interrupted by COVID. And so our efforts We're halted a little bit. The lion's share of it was initially focused on our larger plants in North America. We're seeing those benefits now happen in Europe.

Speaker 2

We positioned Dave Denstedt, who's our Performance Coatings Group President. We also had a big presence in Europe. He and his family moved this summer to Europe and he has a senior leader oversight to help accelerate Some of the opportunities to drive efficiencies more aggressively in Europe, the decision to divest Business in the UK and closed some underperforming operations were part of that. And so all of that should Both favorably for growth and margin expansion in Europe quarter by quarter and over the next couple of years.

Speaker 7

Great. Thanks. And just to follow-up, strong EBIT margin growth on CPG as well. Is there a limit to how much additional margin improvement you can see there? Obviously, you've gotten to 18.5%, maybe talk about Some of the specific to CPG benefits from MAP and pricing as well?

Speaker 2

Sure. I don't know that I would talk specifically about limits to EBIT margin growth any of our businesses, we still have room to grow, but not surprising from my earlier comments, There is a trade off in the near term between expanding margins and investing in organic growth. And back to the big picture thing, if we simplify for us RPM internally into what our investors, what we're trying to do here It's significantly improved our cash conversion cycle and ramp up organic growth initiatives. We think the economic circumstances that we're in call for that and we're having really good progress in the cash conversion cycle Improvement and there's more to come. And we're having really good improvement on the organic growth piece in construction products.

Speaker 2

And we're hopeful that we'll see more benefits across more RPM Companies in the coming year.

Operator

The next question comes from Frank Mitsch of Fermium Research. Please go ahead.

Speaker 14

Good morning, Frank. Good morning, Frank, to you as well. Nice start to the year. I want to come back to the MAP 25, I believe you mentioned before that you're expecting a benefit of $160,000,000 in fiscal 2020 But my understanding is that that's the run rate, right, that you're expecting to end this year and you guys are actually expecting about $100,000,000 to impact the 24 P and L, is my understanding correct?

Speaker 2

That is 100% correct, and I appreciate your clarifying that.

Speaker 14

All right, great. And what was the actual benefit that you saw in the Q1 from MAP 20.25 of the $309,000,000 EBIT?

Speaker 4

We ran at about the run rate you'd expect. So it was about a quarter of that year's benefit, maybe a touch ahead. So $25,000,000

Speaker 2

or $30,000,000 And we communicated in July, we had $120,000,000 goal In fiscal 'twenty three, we exceeded that. And we have $160,000,000 run rate goal. And you're right, we do expect 100,000,000 Flow through our P and L, some of that is benefits that will begin to be realized in the second half of the year in terms of run rate. Some of that is the impact of FIFO accounting both in terms of conversion costs and the commodity cycle benefit that shows up in our case maybe 60 or 90 days later than Where we on LIFO. And so that's what's happening there.

Speaker 2

But we are on or slightly ahead of target For that $160,000,000 run

Speaker 1

rate for the

Speaker 2

year, and as I said earlier, I would expect about half of that or slightly less than half of that To be associated with the commodity cycle benefits as well. This should be the year, unless we get surprised by oil prices or some other spikes. And as we look in the past where the lion's share of the commodity cycle benefits should show up.

Speaker 15

Got you.

Speaker 14

Well, we are seeing oil starting to pick up since the beginning of July. But I wanted to also ask a bigger picture Sure. Macro question. Given that the guide for the year assumes no recession and you've been indicating that You've been seeing red turn to yellow turn to green, I believe you mentioned last quarter and reading through the release, It sounded fairly promising. So I'm just curious as to where do you stand on the hold hard landing, soft landing, no landing for the U.

Speaker 14

S. Economy For your fiscal year?

Speaker 2

Yes, I think and maybe Rusty can comment on this. Rusty Gordon has captured the sentiment of this better than any economist I know and maybe it's a combination of his reading and seeing our numbers, but It feels like we're going through a rolling recession and the housing market has taken it on the chin. You can See it in our Specialty Products Group results, you can see it in companies that serve residential construction and or The components that go into that, furniture and other things. Retail takeaway has not been very Across many categories and as we commented in the second half of last year, POS in our categories tended to be Mid to high negative single digits. We're seeing that improve, which means it's less bad.

Speaker 2

And so I'm hopeful that there'll be somewhat of a soft landing in the sense that This is a rolling recession. Again, Europe went in early. We're seeing better performance in Europe. Think there is more stability around the impact of the Russia war on Ukraine. We're rounding easier comps and quite candidly there is Some reasonable growth in the UK for instance.

Speaker 2

And the UK seems to be performing better than Continental Europe as we sit here and For us, that's a good thing because a little less than half of our revenues in Europe come out of the UK. And so That's the best shot I have at that Frank. And other than to say a lot of our performance in this quarter and what we expect in the second quarter is as much self help As it is counting on any economic green shoots or pickups.

Speaker 14

Very helpful. Thank you so much.

Speaker 2

Thank you.

Operator

The next question comes from Kevin McCarthy of Vertical Research Partners, please go ahead.

Speaker 10

Good morning, Kevin. Good morning. Frank, I wanted

Speaker 16

to ask About the impact of fiscal stimulus, it seems like the infrastructure and reshoring project contributions have really Gained some traction over the last couple of quarters. Can you speak to the kind of the magnitude and duration Of that tailwind, do you think it will continue to accelerate as the year progresses or flatten out? And When do you see the peak in that phenomenon?

Speaker 2

Yes, I still think that there is a significant amount of fiscal Tim, it was coming. The infrastructure bill that was passed on a bipartisan basis I think it was $1,200,000,000,000 I think the analysis of that kind of although it was infrastructure, but if half of it $500,000,000 or 100,000,000,000 was infrastructure. That's still coming. You can see that in highway construction. You can see that in the on shoring of manufacturing.

Speaker 2

You can see that in some expansions in airports. So I think as we sit here today, we see that having a pretty good runway for the next year and a half or 2. And that's our best guess. It's not having any impact on residential construction in the housing market. And I think that in commercial construction as well, there's 2 big macro trends that are fighting each other.

Speaker 2

One is massive amounts, 1,000,000,000,000 of dollars of federal subsidies and stimulus fighting the fastest Interest rate increase that this country has ever seen. And you look at bond rates today, the cost of mortgage, the cost of rent, The cost of a lot of things that are debt driven are continuing to go up. So those are the 2 macro trends I think that are fighting each other relative to Now these things impact the economy to your question and impact us. But for portions of our Construction Products Group and portions of our Performance Coatings Group, we think there's still pretty good tailwinds there.

Speaker 16

That's a great Segue to my second question. You spoke earlier on the call, Frank, about how higher interest rates render Acquisitions a bit less appealing relative to the era of free money. The flip side of the coin is maybe divestitures become Less punitive or less dilutive. And in the case of low margin businesses, we're starting to see a couple of examples where Divestitures can actually be accretive. And so I'm tempted to ask you, as you kind of look across the portfolio, do you think the next year or 2 In the portfolio to follow the trend that you started with Guardian?

Speaker 2

Sure. We're continuing to look as part of our MAP 20 25 initiative, at opportunities to improve margins where we have Low margin, no growth businesses. The latest example of that was in this quarter where in the UK, we were able to Sell off a service element of our U. S. Sale business and then also restructure a piece, taking the high margin product lines and Different parts of RPM, paid off nicely.

Speaker 2

The divested piece It's gone to a group that will retain all the employees there and continue to drive that business in a manner that works for them, but Was not margin positive for RPM. So part of the self help and what we expect to be a quarter by Quarter and meaningful improvement in European margins is not only the broader dynamics we're talking about, But divesting or closing or restructuring lower margin no growth businesses. There is more of that to come Over the next year in our MAP initiative in different segments and it tends to be either product line or specific facility related And when they're executed, we'll provide details.

Speaker 3

Perfect. Thanks very much.

Speaker 2

Thank you.

Operator

The next question comes from Jeff Zekauskas of JPMorgan. Please go ahead.

Speaker 2

Good morning, Jeff.

Speaker 15

Hi, good morning. Thanks very much. I think on an adjusted basis, your SG and A costs were up about 12% in the quarter. Isn't that way too high? And in general, should your SG and A costs Grow above the rate of sales growth, below the rate of sales growth, at the rate of sales growth over a longer period of time or do you not have a target?

Speaker 2

Sure. So in general, the SG and A in the quarter was up 10.9%, and so I'm not sure where the adjusted numbers came from? Yes. Yes. And it really goes back to my earlier comments.

Speaker 2

A couple of things are driving higher SG Some of it is continued inflation in wages and salaries that we're beginning to annualize. We're not seeing that so much today As we were seeing it throughout fiscal 'twenty three and so in the first half of the fiscal 'twenty two, the higher wages and salaries, insurance costs, All the things that impact us and all our peers are there. The other element is really twofold. One is being much more deliberate about driving mix. I mean, you're talking to a CFO and a CEO of a company Who maybe 5 or 7 years ago wasn't very good at analyzing mix with great accuracy in hindsight.

Speaker 2

And today with the data initiatives we have in place on the ground at the operating level, we're much better at driving mix going forward. Where do we want to incentivize our sales forces to focus their time with higher mix comes higher commissions, particularly in our construction products and performance coatings group, Where we still have a fair amount of commission based sales. And then lastly, are the very targeted initiatives that I've been talking about. We fully intend as part of MAP25 to take some of these margin savings and reinvest them in our P and L and growth initiatives. It's paying off in a big way in construction products today.

Speaker 2

And I think as long as we can generate solid sales growth And earnings growth. And again, I would remind you, we're generating positive results as RPM And in most of our segments other than SPG on top of big mountains. Last year, consumer sales were up 22.5%. RPM had an all time record Q1. I think our EBIT last year in Q2 was an all time record and it was up 36%.

Speaker 2

We expect to top that. And so as long as we have forward momentum on the sales line and we're experiencing both the improved cash conversion cycle and the margin enhancements that we expect. We will continue to reinvest in these growth initiatives. And then we have to have the discipline when after a couple of 2 or 3 years of investing, we're not seeing the expected results To cut back in those areas. As I mentioned earlier, Jeff as well, we are targeting very Specifically, what we call BIG, Big Ideas For Growth Investments separately in an SG and A sheet.

Speaker 2

And if the economy turns sour quickly, we have already lined up the specific SG and A cuts that we could make.

Speaker 7

Okay. And then maybe

Speaker 2

Yes, I would just comment on that. As long as we You 2 outperformed quarter by quarter versus some big year big pounds last year. I would expect for the balance of the year For you to see SG and A rise at a level higher than sales, while at the same time you'll see gross margin and EBIT margin Expansion for the year. In the long run, SG and A should grow at or below The level of sales growth, that's correct.

Speaker 15

Okay, good. All right. And then for my follow-up, Sort of a 2 part follow-up. Should inventory levels change very much this year? You're kind of flat Sequentially, but raw materials are down and demand is sort of soft.

Speaker 15

And then in construction, I think you talk about mid single digit growth For the Q2, but you grew organically around 10% in the Q1. And I get it that the price Comparisons will be a little bit harder, but what accounts for the step down in construction growth and Will inventories change very much from where we are? Yes.

Speaker 4

On the inventory side, Jeff, as you know, we have map objectives to Reduce working capital and inventory is a major piece of that. You've seen progress this year. I think what might be a bit different as we go forward for RPM is traditionally in the late winter time, we would build up Safety stocks for the big spring orders. And I think thanks to a lot of our MAP improvements, you will not see that as pronounced Going forward for RPM because we'll be able to respond better to typical higher seasonal demand. So that's your answer on inventory.

Speaker 4

Yes.

Speaker 2

And in general, this year, I would expect a 300 basis point, maybe more improvement in working capital as a percent of sales And you're seeing that. We had an all time record cash flow in Q4, all time record cash flow in Q1 And inventory improvement has been a meaningful part and working capital improvement has been a meaningful part Of that record cash flow generation along with margin expansion. Thank you.

Operator

The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Speaker 17

Good morning, Vince. Hey, this is actually Steve Haynes on for Vincent. Thanks for squeezing me in here. Question on the guidance. Q1 was a bit better than expected.

Speaker 17

It looks like 2Q is also kind of a bit better than expected and your macro views don't Sound that much worse at the margin versus kind of where we were last quarter. So I guess kind of what's keeping you from being more biased Towards the high end of your guidance range.

Speaker 2

Yes, great question. The volatility we've experienced over the last 2 or 3 years is what's keeping us Being more bullish, we have seen sharp turns in Economic conditions that we didn't expect, we've seen trends that look great for a while and then reversed. And there's nothing about all the headlines of and not to get too big picture, but Whether it's government shutdowns or anticipating things might get a little dicier as we get into an election year. And as bond rates actually start to rise, maybe we'll see a normal Bond cycle in terms of the reverse of the current interest rate conversion. There's nothing that suggests that the economy is getting better.

Speaker 2

And so we're focused on delivering what we can control, Anticipating that we're going to see challenges. Boy, if We hit a soft landing and the start of calendar 2024 is peaches and cream With our MAP initiatives and positive unit volume growth across our organization with easy comparisons, We'll have a blowout second half. Most of our reading of the economy is people are anticipating that if we're going to have recession, it's going to start at the beginning of next year. And so, we don't have any confidence that the economy is getting better. We just know the things that we can impact are continuing to happen.

Speaker 2

So we're pretty confident in Q2 and beyond that we'll Give you our level of confidence or lack thereof for the second half of the year when we have a chance to talk to investors in January.

Operator

The next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Speaker 2

Good morning.

Speaker 10

Yes. Good morning, Arun.

Speaker 6

Good morning, Frank. How are you?

Speaker 9

Good. Thank you.

Speaker 6

Just wanted to go along those lines. I had kind of the same question as to potentially why you're not raising guidance Full year, but also wanted to add on there, a lot of folks that we speak to are speaking about destocking and Inventories coming down, you mentioned 300 basis points. But you're again, you're a little less A little bit more cautious on the rest of the year from a volume standpoint, no confidence that things are getting better. Is that what your customers are saying too? I mean, Shouldn't they be thinking that they're more of a in a coiled spring kind of situation where as soon as somebody bites, Maybe they all start buying and we see a little bit better performance.

Speaker 6

What do you think is really holding them back as far as making greater commitments? And if you think that restocking is not going to be as pronounced as in the past, why is that the case? Thanks.

Speaker 2

Sure. So a couple of comments. Number 1, we're hesitant to really comment much beyond what We've done particularly in the second half. I'd point out again, I think MAT 25 and our growth initiatives are delivering Because we anticipate a record level of sales and earnings in Q2, albeit somewhat modest, On top of the quarter last year where sales were up 9% and earnings were up 36%. So unlike some peers, we're not rounding easier comps or modest Comps, we're rounding an all time record 2nd quarter and we're going to beat it.

Speaker 2

As it relates to the broader question, I really think the interest Rates are biting more people in more parts of the economy. It was the fastest rate increase in the history of the United States. And there is a lag effect of when the Fed raises rates and how it filters into you name it, car loans, Housing, rent, mortgage rates, etcetera. Now I'm playing economist I'm not very good at that, but you're going to have student loans that are going to begin to have to be paid starting this month. So there's a lot of different elements out there that I think make people hesitant.

Speaker 2

The last comment I'll say and I think we're doing a pretty good job of this. And so I look at RPM sometimes to think what our trends. So our capital spending is really solid. And so I think most of our manufacturing customers who are doing capital spending, That's really solid and we see that in the results of our PCG and our construction products through to a lesser extent. On the other hand, RPM is meaningfully and sustainably improving our working capital ratios, which means we're bringing down levels of inventory.

Speaker 2

So are most of our customers and so are most of our competitors. So those trends are continuing and so I hopefully that answers your question.

Speaker 6

Thanks, Frank. And one quick follow-up. How much of the MAP savings are volume dependent? You mentioned A portion there, what would you quantify that as? Thanks.

Speaker 2

I would say in your 90% of them, They are very targeted at efficiencies in our plants, so lower conversion costs, a better cash conversion cycle. So that's all about how you get rods to the door, what you pay for them, how quickly you add value and how quickly you get it out the door. And then even a lot of the data decision making is helping us drive a positive mix, But that's about what we sell. And so that's why I do think you'll see a nice rebound into the mid or upper teens in terms of EBIT margins In our Specialty Products group, when the volume returns, they're doing the work and it's having a real impact in their operations. But they've been through now 7 months or so of negative unit volume growth.

Speaker 2

So the benefits of the work there aren't going to show up until we start seeing Positive volume growth. So very volume dependent. It's why you're seeing the nice leverage in our construction products group When you have positive unit volume and the MAP savings are real, you'll see really nice leverage to our bottom line.

Operator

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

Speaker 2

Andrea, thank you very much. 2024 started out with positive momentum and we look forward to leveraging our strengths to build on this strong start For the rest of the fiscal year, we appreciate you're joining us today and hope you will join our Annual Meeting of Stockholders Online tomorrow will be done virtually. It's at 1 p. M. Eastern Time and it can be accessed through the RPM website, www.rpminc.com.

Speaker 2

At tomorrow's Board meeting and our annual meeting, we will be announcing Our 50th consecutive increase in cash dividends to our shareholders, and our Board will be deliberating tomorrow about what that will be. I'd like to put that in perspective. If you like the power of compounding interest, you'll love the power of an annually growing cash dividend. My father, Tom, started our consistent consecutive growth in cash dividends 50 years ago in 1973. Since then, we have had a compounded annual growth rate over 15 years to our shareholders, including reinvested dividends 15.1 percent.

Speaker 2

To put that in further perspective, if you invested $1,000 in the S and P 500 In August of 1973, today you would have $178,000 That same $1,000 invested In our Amstock in August of 1973 with reinvested dividends would deliver a $1,150,001 value today. And as far as I can tell, about a third of that value creation was driven by our annually growing dividend. It's a track record that we're very proud of. It speaks to the stability of RPM strategy and businesses, and we're excited About the outcome of our 2025 MAP to Growth initiatives where we are focused on significantly improving our cash conversion cycle and on reigniting organic growth in most of our businesses. Thank you for your participation in our investor call today And we hope to hear from you and to have you join us for our Annual Meeting of Shareholders tomorrow.

Speaker 2

Thank you and have a great day.

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Earnings Conference Call
RPM International Q1 2024
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