RPM International Inc.

Welcome to RPM International's conference call for the fiscal 2022 third quarter. Today's call is being recorded. 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 should cause actual results to differ materially. For more information on 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 directly comparable GAAP financial measures following today's presentation, at which time, if you wish to ask a question on your telephone, please note that only financial analysts will be permitted to ask questions. At this time, I would now like to turn the call to RPM's chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Good morning.

Welcome to the RPM International 2022 third quarter. My name is Rusty Gordon, RPM's vice president, and Mike LaRoche, our vice president, controller, and chief accounting officer. I want to commentary on our consolidated performance for quarter michael provide detail and rusty will conclude with our formal remarks on our outlook for the fourth quarter of fiscal 22 after which we'll take your questions please note that our comments will be on an as adjusted basis and all comparisons are to the third quarter of fiscal 2021 unless otherwise indicated section of the RPM website at www.rpm.com.

For the third quarter of our fiscal 2022, RPM generated record consolidated EBIT and sales, despite a difficult comparison to the prior year. These results were driven by our associates worldwide who persevered despite an extremely challenging operating environment. including ongoing raw material and labor shortages, Omicron-related disruptions that were particularly acute in the third quarter, as well as material, wage, and freight cost inflation. Our consolidated adjusted EBIT growth was driven by three of our four segments, construction products, performance coatings, and specialty products, which leveraged selling price adjustments and operational improvements to the bottom line. Our consumer group is the outlier. Mike will discuss this in more detail when he presents our segment results. With our primary raw material costs up more than 40% on average versus a year ago, our consumer group will need to catch up with significant selling fast to respond to supply chain challenges by quickly scaling up in-house resin production at manufacturing facility we acquired in September. Additionally, due to our ongoing investments in the fastest-growing areas of our business, our construction and coding systems have generated accelerated growth. Construction and industrial maintenance activities have been covered, while consumer take-away remains strong. Due to three years of extraordinary work by our associates to implement our Map to Growth operating infrastructure, structural improvements to RPM while maintaining our entrepreneurial culture, which is a core strength of RPM.

As a result, our performance coatings group and construction products group are operating not only at record sales and EBIT, but at record margins in the third quarter.

Our specialty products group is trending towards this same performance with record results in sales and EBIT in improving margin performance. And we are making good progress in our consumer business. In short, we are playing offense growth, significant increases in capital expansion, particularly in the areas of New Dura ICF, roof restoration coatings, and a number of our consumer product areas all of which are building positive momentum as we go into the fourth quarter and we roll into fiscal 2023. I'd now like to turn to Frank to answer results in more detail.

Thanks, Frank, and good morning, everyone. During the third quarter, we generated consolidated net sales of 1.8% compared to the 1.27 quarter of fiscal 2021.

The third quarter was 13.4%, or $170.1 million. Acquisitions contributed 1.4% to sales, while foreign exchange was a headwind for $23.4 million. Adjusted diluted earnings per share were $0.38, which was unchanged compared to the year-ago quarter. Our consolidated adjusted compared to the $79.9 million reported in the fiscal year.

On a double-second basis, comparing the fiscal Q3-22, the pre-pandemic Q3 of FY20, sales, EBIT, adjusted EBIT, net income, and PPS all achieved double- or triple-digit growth.

First and second quarters of fiscal 22, reflects the benefits of our balanced business portfolio, where softness in one segment is generally offset by strength in the others.

During the third quarter of fiscal 2022, three of our four operating segments, construction products group, performance coatings group, and specialty products group, generated strong double-digit sales growth. Combined sales in these three segments while sales in the consumer segment were up modestly. Again, after removing consumer, the remainder of RPM produced exceptional adjusted eBay growth of 97%. Our consumer group continued to be disproportionately impacted by inflation, as well as by Omicron-related labor and supply chain disruption, particularly during December and January. This instability in supply caused inefficiencies and continued to negatively impact conversion costs, resulting in a decline in adjusted EBIT at our consumer group for the fourth consecutive quarter. Later in the call, we'll discuss the actions we're taking to address these generated third quarter record net sales to $482 million, up 21.7% compared to the fiscal 2021 third quarter. Organic sales growth was 23.2%, and acquisitions contributed 2.2%. Foreign currency translation headwinds reduced sales by 3.7%. CPG record revenue growth was largely due to the segment's ongoing success in promoting its differentiated restoration solutions, which offer particular advantages versus new construction given the current raw material.

We continue to help speed the adoption of the segment's innovative building envelope products. CPG's fastest growing businesses were those providing group products.

The segment's international operations generated strong top-line growth in local currencies, which was muted by the strengthening U.S. dollar. CPG fiscal 2022 third quarter adjusted EBIT increased 89.7% to a record $35.1 million. Despite a difficult prior year comparison, CPG was able to dramatically increase adjusted EBIT and EBIT margin to third quarter records due to improved product mix, volume growth, and operational improvements. All of these factors combined with selling price increases helped to offset high raw material inflation. Our performance coding group's fiscal 2022 third quarter net sales were a record $270.9 million, an increase of 19.6% over the year-ago period. Organic sales increased 17.8%, and acquisitions contributed 3.4%, which were partially offset by foreign currency translation headwind of 1.6%. PCG continued its momentum with all of its North American businesses generating double-digit organic sales growth, generated explosive growth, and its European companies continued their steady rebound. Driving its strong top line were increased industrial maintenance spending, recovery in energy markets, and price increases. PCG's best-performing businesses were those providing polymer flooring systems, corrosion control coatings, and raised flooring systems. Adjusted EBIT increased 89.9% to a record $26.8 million during the third quarter of fiscal 2022. Adjusted EBIT increased as a result of volume growth, operational improvements, and a more favorable product mix. Additionally, adjusted EBIT margin was a figure net sales of $189.4 million during the third quarter, an increase of 11.9%

compared to the fiscal 2021 third quarter. Organic sales increased to a currency translation of 0.6%. SPG generated record sales as a result of strong prices, with the highest growth coming from those serving OEM and food additive markets. In addition, this segment's sales of disaster restoration equipment rebounded after security. This is an example of how our businesses quickly adjust to challenges demonstrated in the entrepreneurial culture. This business did face a tough time when demand for its restoration equipment was inflated because of winter change. The adjusted EBIT was a record $26.

$6.6 million in fiscal 2022 third quarter, an increase of 5.4% compared to adjusted EBIT of $25.3 million in the last year's quarter. This record adjusted EBIT was largely due to operational improvements. Our consumer group achieved record net sales of $491.6 million during the third quarter of fiscal 2022. an increase of 2.9% compared to the third quarter of fiscal 2021. Organic sales increased 3.6%. Foreign currency translation of 0.7%. As we anticipated, due to its ability to mitigate the severe alkyd resin shortages it had experienced by leveraging the new Texas manufacturing facility, sales and productivity

were challenged by unreliable shipping and supply, resulting from labor shortages caused by the Omicron number in January. Speaking of challenges, the consumer group also faced a difficult comparison to the prior year period when sales increased 19.8%.

and adjusted EBIT increased 48.6% due to elevated demand for its home improvement products during the pandemic's first phase. Fiscal 2022 third quarter adjusted EBIT was $17.2 million, a decrease of 63.9% compared to adjusted EBIT of $47.8 million reported during the prior year period, RPM's other segments.

Raw material inflation, in particular, an impact on EBIT. Partially offsetting these factors, price increases and operational improvement is currently investing in capacity and as well as building resilience in its supply chain.

The consumer group is continuing to implement price increases to catch up with the inflation this segment has experienced over the last four quarters.

Lastly, I'd like to note that we have significant liquidity, which enables us with cash dividend payments and repurchase our shares. The $100 million bond offering we completed in January. Also during the third quarter, we repurchased $15 million of our common stock. Now I'll turn the call over to Rob. Thanks, Mike. 2022 fourth quarter.

Our operations and those of our suppliers are expected to be impacted by ongoing supply chain challenges and raw material shortages, which will exert pressure on revenues and productivity. The strengthening U.S. dollar will also unfavorably impact the translation of our results in international markets. In addition, the war in Ukraine is creating some supply and inflationary pressures, which Frank will address in a little bit. While it's too soon to tell, rising interest rates may slow business and consumer spending in the coming months. Despite these challenges, we expect to generate in the low teens versus a difficult comparison to last year's fourth

quarter sales, which grew 19.6%. On a segment basis, we anticipate sales we are making to capitalize on market opportunities.

We anticipate that consolidated adjusted EBIT for the fourth quarter of fiscal 2022 will increase in the low teens versus the same period last year, when adjusted EBIT was up 10.6%. We expect that earnings will continue to be affected by raw material, freight, and wage inflation, as well as by the impact on sales volumes from operational disruptions caused by raw material shortages. Our consumer group will be disproportionately impacted by these issues. Its EBIT margins have eroded all three-quarters of this fiscal year due to inflationary impact on the consumer group and RPM's other segments. We continue to work to neutralize these factors by improving operational efficiencies, employing additional price increases to catch up with inflation, and adding manufacturing capacity to improve resiliency. This concludes our prepared comments. We are now pleased to take your questions.

Good morning, Frank. Good morning. Hey, good morning, Frank. From what it was in the... You know, where you see that trending, what is the most particular concern for you in terms of raw material availability? Sure, I can give you some of all. We were starting to see some... out of raw material production. Prices in certain resins and other categories, oil-related items until the Russian war on Ukraine. And that flattening out has changed, and things are once again, for geopolitical reasons now, looking like it might be heading up.

So it's anybody's guess as to where we'll be in the fourth quarter. I can give you some specifics just to put things in context. 13% acrylic latex is up 41%. Monomers are up 86%. More acrylic product lines. Epoxy is up 106%.

Sad hiring increases in critical raw material. We had seen a significant improvement in availability. Most of the force, not all, but most of the force measures that had been announced over the last

in 12 to 15 months had been rescinded. But once again, we're anticipating some challenges in certain resins, particularly some bio-based resins that we source in Europe and from India as a result of the disruptions from the rainwater.

Gotcha, gotcha. So you did mention a couple times on the call that you are implementing price increases.

You continue to Implement price increases.

How do we think about when, you know, given what we know today in terms of when RPM will be able to have pricing cover the impact of raws? And I guess part of that question is also if you're looking at sales in the fiscal fourth quarter up both teams, how are you looking at that in terms of price versus volume versus FX?

Sure. On average, in the quarter, price was up 12.5%. And so you can see when you look at the organic growth, we had production products group and our performance coatings group, a modest mix of what would appear flat, especially products group, but was events and others not. And when you do the math, you'll see that we had actually unit declines in the quarter in consumer growth. That was as much a result of the manufacturing and operating disruptions, raw material challenges. As we think about the fourth quarter, as Rusty indicated, going into Q4, we would expect to operate at record levels of sales, EBIT and EBIT models, performance codings group, and at this point we believe in our specialty products group. And so on a consolidated basis, I think we have a shot at having record results. It really depends on where we finish the quarter in consumer. As we sit here today in Q4, price will add about 12.5%. in our consumer group at the end of this month in relationship to both being impacted the most directly by raw material costs and packaging costs being small project driven in paints and patch repair and clocks and sealants we have a disproportionate packaging impact there as well and so We will report results in July. I would anticipate that we will be somewhat higher in the fourth quarter than the 12.5% based on our current pricing situation across RPM today. Got you. Very helpful. Thanks, Frank. Thank you.

Your next low market. Your line is now open.

Yeah, good morning, and thanks for taking my question. Hey, Frank, and great job in a really tough environment. I guess I wanted to dig into maybe two areas. The first one would just be on what we're having for you guys for the last three quarters or so. It sounds like you've got some of that remedied with the Texas facility up and running. How should we think about how that takes some of the pressure off the consumer business? It seems like there's a lot of other moving parts, but I guess how much does that flip the switch where things get noticeably better for you?

Sure. Since the fall, we have added internal capacity with the addition of the Corsicana, Texas plant. and the team there's ability to ramp up successfully in producing alkyd resins, which they had not done before. That was part of the reason for the acquisition. There was another supplier during that time frame that withdrew supply from the marketplace. So it remains a challenging environment, let's say. And again,

the the alkyd situation is is a particularly critical raw material for our consumer group got it so so you've got your asset running but it sounds like somebody else actually took more capacity out so it maybe it's helped but not not as much as it otherwise could have is that right that's correct got it okay and then on the construction business you know the volumes are are really they're seeming like they're they're kind of really humming at this point i guess Can you speak to how you see that playing out throughout the rest of this year? And because you have kind of a contractor approach where you've got your own labor force, like I guess I assume it gives you better visibility around that business. So I guess how far out in terms of line of sight do you have around the business trends that you're seeing there?

So I would tell you that the line of sight anywhere isn't very good relative to all the dynamics in the marketplace. You know, as we roll into Q1, I would expect us to have record results in sales, earnings, and margins everywhere. That includes consumer based on the actions that we're taking. and also rounding finally some easier comps after the extraordinary kind of stay-at-home driven boom in DIY products that we're rounding now. You know, I think that organic growth that we're seeing in our construction products group for the foreseeable few quarters, as far as we can tell, will remain in the mid to high 20s. single digits on an organic growth basis. You can add about 12% in terms of sale price impact to that. So, again, without getting too far over our ski tips, just because it's difficult to predict the future in this environment, the momentum going into the next couple of quarters is really strong, and it doesn't seem like there's anything that we'll interrupt at at this point. For roof restoration coatings,

As we sit here today, we could be selling more, but we are out of capacity in a few of these product areas.

And we have a significant capacity expansion program in New Dura, the first elements of which will go into effect at the end of the fourth quarter and through the summer. We have a significant capital expansion in our roof restoration coatings, which should roll out throughout the balance of this calendar year.

Got it. Actually, just as a follow-up to that, can you help us to understand how much capacity that might unlock?

Sure. I can tell you in roof restoration coatings, probably another $50 or $100 million. And in New Dura, we hope to realize another $40 or $50 million of capacity by the end of this calendar year, and as much as another $100 million of capacity by the end of the summer of 23.

Wow, okay, so pretty notable. Okay, thanks very much for the call. That was really helpful.

Thank you. Your next question comes from the line of Gansham Punjabi from Baird. Good morning, Gansham.

Good morning, Frank. Thanks for putting me in. You know, just given that Europe is a pretty significant end market for RPA, et cetera.

Sure. Our business, first I'll tackle Asia. Our business in Asia is relatively modest compared to some of our peers. We're not seeing much of an impact, but mostly because we don't, have a big slug of business there. And the business that we do have is driven by our industrial product lines. And so at this point, it's relatively stable. We're not seeing much negative impact. As it relates to Europe, Europe was recovering more slowly than North America, for sure. And that recovery seems to be okay today, although we have not seen any meaningful disruption to our business activities as of yet, although we're certainly heightened to that. As it relates to the Ukraine situation, we were very quick and early to discontinue any and all business activities in Russia. We don't have any manufacturing business there. The business we do have is relatively modest, so it's about $5 or $6 million on an annualized basis. And we both felt it was the right thing to do, and we're certainly wanted to respond to concerns that a significant number of our workforce in European manufacturing and distribution of Ukrainian descent. And so, you know, that's the impact on Russia and the Russian war in Ukraine. But in general, we're heightened of kind of anticipating impacts, but we haven't seen it yet.

That's very helpful. Thank you, Frank. And just in terms of the energy end markets, I mean, obviously you've seen a major step function higher with energy prices, et cetera. Just remind us how big energy is as an end market for RPM and what you're seeing in that end market from a recovery standpoint, yeah, post-COVID. Sure.

Our energy exposure is mostly in our performance codings group. And mostly in Carboline, so the performance coatings group, let's say, is about a billion one. And Carboline and Stoneheart are by far and away the two largest business units there. I would guess directly and indirectly, and now you're talking broadly, you know, oil and gas and refinery and pipelines and things like that, probably $300 million or so of exposure to oil and gas markets broadly. Again, as you can see, we've got high teams, organic growth, high single-digit unit volume, and there's somewhat higher growth in that business than average, and those businesses are product lines that are exposed to energy markets, and we see that continuing. So there's a little bit of a double-edged sword in that it is driving a significant increase in in capital spending and business for us in our industrial segments it's also driving a significant increase in our raw material costs as well so fantastic thanks so much thanks gancham your next question comes the line of steve byron from bank of america the line's now open good morning good morning um

You have this intermediary between you and your end customer in your consumer segment, and I just was curious, what is the process that you go through to get price in the consumer segment? Is there a delay? Is that a negotiation? Does that represent a bigger challenge for you than in your other segments?

Yes, there is typically a delay, and yes, it is a negotiation, particularly across our large customers. We've announced three price increases over the last 12 months, and the timing of those being instituted across large customers varies a little bit, not a lot. And we are both disproportionately being impacted by raw material costs, both direct chemical raw material costs as well as packaging costs in our consumer business, and as our numbers reflect, somewhat behind the curve in terms of addressing cost-price mix, which is necessitating a fourth price increase that will be announced at the end of this month.

And Frankie mentioned labor shortages in this segment. Is that Is that your, is that RPM employee labor shortages? Is that your customer or distribution channel? And is that improving at this point?

It was really in two areas. The biggest area, our largest plants are our consumer plants. And we had in a number of Rust-Oleum plants, both our largest DC, which is in Wisconsin, and our largest manufacturing facility, which is in Wisconsin, a meaningful impact of Omicron in terms of either people that were out infected and or people that were quarantined because of exposure. And so it had a disproportionate impact on our consumer business, particularly Rust-Oleum. We also saw it in our consumer business with, you know, the just-in-time pandemic. Traditionally, just-in-time freight delivery of RAS into our plants and then distribution where some of our customers pick up, and in some cases we handle freight. And there was a disproportionate impact over that period of time, we believe, because of Omicron on freight availability and truckers, and so that impacted the segment as well.

In the last month of this next quarter, are you seeing things improve for you?

Yes, we are. In that category, we're seeing things improve, and so the flow through our plants is significantly better. That will help profitability and margins as we go into the fourth quarter. So, you know, the Omicron spike both across RPM, we've been tracking quarantine and infections in COVID literally from March of 2020 every week. The Omicron spike was shockingly quick, high, and then dissipated pretty quickly. And so we're back to a much more normal pace in terms of not having that same disruption at the end of February and in March. And we're hopeful that, you know, the worst of COVID is behind us. It seems like if COVID isn't done with America, America is done with COVID. So... Very good. Thank you.

Thank you. Your next question comes to the line of Vincent Andrews from Morgan Stanley. Your line is now open.

Good morning. Hey, this is Steve Gaines for Vincent. Thanks for taking the question. So I want to ask a question on cash flow. Operating cash has been about $500 million year-on-year through the first nine months, and it's mostly on working capital. So could you just talk a little bit on – How are you thinking about operating cash generation for the full year and if you're expecting kind of a big release of working capital in the fourth quarter?

Sure.

You're absolutely right.

You know, operating cash flows were negatively impacted by working capital, largely driven by supply chain issues we've been discussing and inflation, quite honestly. You know, we expect that inflation is going to continue, and we're going to continue to purchase opportunistically where we can to help lock in availability and price. So you may see some unusual relationships in working capital as it relates to cash flows for the next few quarters.

Okay. Thank you. And then maybe just a quick follow-up on the conversion cost. Is there – the way you can maybe size, like, I guess, the cumulative impact, you know, throughout the full year so far. And just so we can get like an idea of like what the upside is when ultimately that begins to reverse.

Sure. You know, if you look at our EBIT margin in general, quarter by quarter, and in particular, for instance, this quarter where we're suffering the worst in consumer, the vast majority of that EBIT margin decline is a gross margin decline, though we don't disclose gross margins by segment. And of that, I would tell you about two-thirds are maybe a little bit more are material-related, and about one-third is operating efficiency and throughput in the plants. And so we fully expect in all of our businesses, as we get back to normal, the efficiency, workforce disruptions are mitigated or eliminated and put behind us, and we have normal flow-through in our plants to where we were just a couple years ago, that that one-third impact on our margins would be recovered. The balance is literally a cost-price mix dynamic, which we are managing better in our industrial businesses than we have in our consumer businesses year-to-date.

Okay, thank you. Your next question comes from the line of Kevin McCarthy from Vertical Research. Good morning, Kevin. Good morning.

How are you? Good. With regard to your performance coding segment, you said in your prepared remarks that you're seeing explosive growth in emerging markets. That word explosive got my attention. So I was wondering if you could kind of talk through where you're seeing the strongest growth and what exactly is happening. driving that? Is it to do with maybe some of the acquisition activity that you've done or more organic in nature? I'm curious if you can offer any color there.

Sure. It's more organic in nature and we've taken a a broader RPM platform approach to some of the developing markets. And so there's a really good both cooperation between our performance coatings group and our construction products group, the two groups of RPM that have the greatest international exposure and the greatest developing world exposure and a real focus on driving organic growth and investing. So we're seeing significant growth in India. significant growth in Africa, in the Middle East, in Latin America. And I would tell you some of it is recovery from COVID, for instance, in Latin America. Some of it is a result of a more intense focus on a more RPM platform basis. And putting these regions under leaders who are responsible for a broader swath, proven leaders who are responsible for a broader swath of RPM businesses and products, and it's working. The last thing I would note is it's explosive on a relatively small base, but if we keep growing, that base will keep getting bigger and become a more meaningful part of our business.

Great. And then my second question was much broader in nature. If I look at slide 11 of your deck, Your sales forecast for the fourth quarter is extremely uniform across all of your segments. They're all expected to grow at a low teens pace. And so I was wondering if you can talk about 2023. Perhaps it's early to get specific on guidance there. Sitting here today, how would you expect those trends to diverge moving forward? Do you have in your mind a segment that you would expect to grow materially faster than the others or slower at the other end of the spectrum?

I think two comments on that, Kevin. One is I think the furthest out we can really see is a quarter or two. As I mentioned earlier, as we sit here today, I would expect every one of our segments, including consumer, to be generating solid sales and earnings growth in Q1. And the momentum that we are seeing in our performance codings group and construction products group will continue. The specialty products group should be back to record margins, not just higher sales and earnings. And we'll see solid recovery in consumer, both on the top line and bottom line, in part because the actions we're taking are taking hold, in part because the disruptions of COVID are being put behind us, and in part because we'll be rounding some easier comps in consumer. So you ought to see record results in Q1 for RPM and a consolidated business in each of our segments. I think this outlook really is a continuation of what we're experiencing in our three more industrial segments and an expectation that we're finally going to see positive results out of consumer. Longer term, Again, unless the dynamics change, we would expect to have a solid fiscal 23, and we'll provide pretty good details on that in July. And we also hope to be able to provide some longer-term perspective on where we're going with a map to growth 2.0 plan. something that many of you know we've been working on for a while. But our willingness to get out there and make longer-term commitments has been disrupted by COVID and supply chain challenges that were working their way into something more normal and stable until the Russian war in Ukraine. And so I think that's the – caveat here. We're not seeing much of an impact on our European business yet, but time will tell in the coming months as to what impact there might be and to what extent.

Excellent. We'll look forward to the updates. Thanks, Frank.

Thanks, Kevin. Your next question comes from Arun Viswanathan from RBC Capital Markets. Your line is now open.

Morning, Arun.

Good morning, Frank. Thanks for taking my question. I hope you're well. Yeah, so I guess I just wanted to understand the low teens guidance. You know, I think you mentioned 12.5% price. So is that to imply kind of low single-digit unit volume growth or maybe a little bit better and offset by a little bit of FX pressure? How should we think about, you know, kind of your volume versus price, you know, dynamics?

Sure. I think particularly in performance coatings and construction products, we're expecting a mid to upper unit volume growth and, you know, the continuation of what's been about a 12%, 12.5% on average price increase. So you could see results. uh, uh, on an organic basis, uh, in, uh, mid to high teens, that's going to be knocked down a little bit by the strength in the U S dollar, uh, which will take a couple of points off our, our results. So I think, you know, and overall mix, it's certainly possible that we'll continue mid teen performance in, in some of the industrial businesses and would expect to see kind of a low, uh, a low teens, kind of a 10, 12 percentage, uh, in consumer. Um, And so that's where we are. It'll be a mix of both. But I think we feel pretty comfortable with this guidance. And as I said, I think we'll be in the fourth quarter at record EBIT on a consolidated basis and hopefully record EBIT margins. It just depends on how quickly the actions we're taking in consumer affect a stronger recovery there.

Okay. Thanks. And I guess I also wanted to just follow up on a comment you made earlier as far as potentially some of the cost pressures that you've been feeling over the last couple of years had been plateauing or flattening out. And then there was a little bit of a spike, I guess, with the Russia-Ukraine invasion. Is that moderated now? It does appear that, you know, some of the energy price impacts have started to moderate as well. Would you say that that's the case, and do you see that this is kind of a longer-term impact, or is it just, you know, kind of transitory?

It's hard to say right now. Again, we were seeing some underlying positive trends in things like ethylene, propylene, and even some of our direct purchase raw materials. And all of that reversed with the Russian war in Ukraine. And really, who knows? And I'm not trying to be cagey here. If this thing is resolved, which I think the world's praying for relatively quickly, then I do think we could see some stability. If this thing expands and has greater impact on oil and gas prices, as well as some of the organic resins that are impacting that we purchase principally from India, but they've spiked up for reasons that I don't, some people do, I don't directly understand other than they've spiked up because of the impact of the Russian war. It's hard to know how this will expand and what impact that will have on raws. And so we are paying attention to both its impact on our European business, which so far, thankfully, has not been much, and its impact on raw material costs, which at least in the near term have reversed an otherwise positive trend.

Great, thanks. And then lastly, if I could just ask about the M&A strategy. You know, I know that there was a greater focus on MAP to growth, you know, over the last couple of years, but are you finding yourselves getting back into the inorganic market as well? How do you characterize the environment there and If there's any focus, what areas are you focusing on, and how are you seeing valuations? Thanks.

Sure. So the pipeline of the typical RPM, small to medium-sized product lines, is pretty good, and we would expect to be able to – just generally complete, let's say, $100 or $200 million on an annualized basis of product line or business acquisitions. That's been our bread and butter. Large transactions have been in extraordinary prices. And I think that you're going to see some mitigation and valuations as interest rates rise and inflation is seen as something that is other than temporal. And we would welcome that. And so that's kind of where we are. We wouldn't expect to be an aggressive player at these historic high valuations, which seem to be persisting now in the face of significant raw material costs. I can tell you Rusty, Matt Ratajkic, Michael Roche, Rusty's team did a 10-year bond at the end of January. Thank you. And we're able to capture a 2.95% coupon. And if we turned around and do that bond today, it would cost us four and a quarter or more. And so I don't know how well the rise in interest rates and its impact on incremental cost of capital is being reflected in the markets yet, but eventually it will be.

Thanks.

Thank you. Your next question comes from Josh Spector from UBS. Your line is now open.

Hey, good morning, Frank. Thanks for taking my question. Just a clarification, first off, just on the ROS inflation, make sure I heard it right. When you talked about the 40% increase, was that total company or consumer? And I guess when you think about that in terms of total variable cost inflation in COGS, what would that number look like?

So I'm not sure I can answer the last part of your question, but yes, the 40% is total company, and that's materials and packaging. It does not incorporate freight or labor, which are also wealth, although certainly not to the same extent. And consumer is somewhat higher, in particular in relationship to its exposure on things like acrylic resins, which, again, year over year are up 113 – or alkyd resins 113%. uh aerosol cans are up 66 so that's really specific to rust-oleum and so they have they have some higher outliers in relationship to their the small packaging uh nature of our consumer businesses uh and the uh disproportionate impact of acrylic resins on consumer versus the rest of our businesses okay thanks that's helpful

And just a specific question on Europe and specifically the performance segment. An epoxy producer earlier shut down some capacity in the region, and part of that decision was related with lower demand. That seems a bit countered in terms of what you guys are seeing in terms of that segment. So curious if you have any thoughts or comments around that. Thanks.

Sure. So first of all, epoxy resin costs for us are up 70% year over year. So that's... Not been a good thing. We have been able to pass on price. There was a reference earlier to our ability to provide supply and apply, which is benefiting us within a lot of our roofing businesses as well as the stone hard flooring business. And so that's been an advantage for us. Epoxy resins and some of the intermediate chemicals into epoxies had some availability challenges earlier in the year. As we sit here today, we're in pretty good shape.

Okay, thank you.

Thank you. Your next question comes from the line of Silk Quick from J.P. Morgan. Your line is open. Good morning, Silk.

Good morning. How are you?

Good, thank you.

last quarter you said that you had a $200 million headwind from lost sales due to the raw material shortages, and maybe $100 million of that was in the consumer segment. Can you tell how much it was this quarter, how much was in consumer, and what do you think you might experience in the fourth quarter, and how do you think about 23?

Sure. I don't think we had much in the way of discernible loss revenue in Q3, and it had as much to do with the seasonal nature of our business, where, as you know, our third quarter is meaningfully lower than our other three quarters. And so we haven't seen as much of an impact that we can point to. It is possible that it would be an impact in Q4 equal to what we saw in Q1 and Q2, just because Q4 is a significantly large quarter for us as We build into a construction season, and we build into a consumer DIY season, particularly for exterior use products. But the short answer is it did not have a noticeable or measurable impact in Q3 like it did in the prior quarters.

And for the fourth quarter, if I just did it right, do you think maybe it's like what I've gotten into, like in the $200 million range, something like that?

I would think it would be half of that and it would be predominantly in consumer unless unless there are raw material disruptions as a result of the Russian war in Ukraine that we don't anticipate sitting here today. But we don't have the the raw material. disruptions in our industrial businesses that we had for the first half of the year. I mean, for the first half of the year, we had enough significant raw material disruptions, either of direct raw materials or ingredients that went into the chemical raw materials we purchased that we had to shut production in numerous places. That is not occurring as we sit here today. And on the consumer side, the disruptions that we had both from a raw material availability perspective and just the normal throughput is improving again as we sit here today. So if we have an impact in Q4, I would bet it would be closer to $100 million across the whole business, but we'll give you the details of that in July. Mm-hmm.

And my second question is on resins. What percentage of your cost of goods sold baskets are epoxy resins, alkyl resins, acrylic resins? If you add it all together, is it like a third of your material cost? Is it bigger than that? And what percentage can you make in-house now? Or maybe what percentage can you make next year, given the manufacturing capabilities you acquired?

Sure. Yeah, in terms of resins, there's not one resin that's even 5% of RPM's total raw material basket. You mentioned some of the bigger ones we do buy, acrylic resins, alkyd resins, epoxy resins. They are meaningful to different product lines. In terms of in-house production, we are supplementing, as we've talked about, in alkyd resins. You know, that's a nice facility in Texas, you know, to absorb shocks and supply like we've had over the last 12 months. But we continue to do business with a number of suppliers of alkyd resins and expect to continue that in the future.

Our expectation would be that the in-house production on alkyd resins would be somewhere in the 20% or 25% range. As I said, we were moving in the right direction, and then another long-term supplier withdrew their capacity from the market in the last couple of months as well, which was unexpected and something we're adjusting to.

In terms of your savings program, are there any measurable savings from the, you know, last bit of, like, the MAP program that you saw in the quarter, or is all of that, you know, eased up by, you know, because some of it is always due to little savings. You can quantify that you've gotten from the MAP program, like, incremental year-over-year?

As best we can calculate, in the quarter, roughly about $15 million. And I'll tell you that the ability of the construction products group and performance codings group to recover in this environment to record levels of EBIT and EBIT margin has got as much to do with the efficiencies from our MAP operating improvement program as they do from a cost-price mix perspective. So it's been hugely – you know, the timing was lucky. It's been hugely beneficial for us as we face the disruptions over the last year.

Okay. And my last question is on the consumer business. So, you know, PPG expanding its relationship with Home Depot and, like, you know, primers and sealers and concrete paint and – stains. When you look at your market share at Home Depot or generally a big box retail business, do you think your share is flat or up or down? Can you tell?

I don't think we have lost any market share and there's no area where we can point to. The biggest challenge for us and for most people in the consumer markets as well as some of the basic architectural paint business is supply. And so, you know, we prided ourselves on fill rates of 98, 99%. It's where we operated for a long time. And as a result of both the COVID disruption and supply chain challenges, fill rates have been significantly lower. And that's been a challenge for us, for others in our industry, and quite candidly when you go to one of the big retailers for people in a lot of places. So the challenge is supply relative to raw material availability and costs and COVID-related disruptions much more so than market share challenges at this point. And we are expanding capacity in our consumer businesses to make sure, as we put these disruptions behind us, that we can get back to those high fill rates and maintain market share and growth.

Okay. Thanks very much.

Thank you. Your next question comes from the line of Mike Cison from Wells Fargo. Your line is now open.

Good morning, Mike. Hi, this is actually Richard on for Mike. So first question, you did mention that the Russian invasion had a meaningful impact on the supply chain, obviously. Is that comment based on just the higher derivative price for oil and products, or is there specific products which may not be available in terms of supply chain, such as CIO2 or other ones?

Yeah, we have not seen availability issues directly, but we saw a pretty quick reversal in what seemed like stabilizing prices and some basic commodity chemicals, some trends that were moving in the right direction that would suggest that maybe our RAS would be stabilizing or perhaps over time going down, and that reversed very quickly. And so it's Obviously, directly oil and solvents and things like that, but it impacted all of our resins. And then, as I mentioned earlier, some of the bio-based resins, soy-based resins, soybeans, stuff like that, there are some availability challenges there, and whether those become big problems or get corrected here in the coming weeks and months, time will tell. Okay, thanks.

And then just to follow up, On the EBIT guidance, low teens across the board, I mean, basically, can you give us some color in terms of where you see the most growth on the EBIT side? And obviously, for consumer, do you expect, you know, sequential improvement as part of that?

Excuse me, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume shortly. Thank you for your patience.

We appear to have a disconnect, and I believe we're back live on the conference call. And so, operator, if there are any additional questions, we would be happy to take them.

Thank you. Your next question comes from the line of Mike Harrison from Seaport Research. Your line is now open. Good morning, Mike.

Hey, good morning. Maybe just to, I guess, close the loop on the last question that was asked. I didn't hear the response, but do you see particular segments with that low teens EBIT guidance for next quarter, particular segments exceeding that? And then I think my question would be, is the consumer business justice?

So I would tell you that our construction products group, performance coatings group have an opportunity. to outperform that low teens between price and unit volume. It'll be somewhat mitigated by FX given the strength of the dollar, but we see good momentum there continuing in both. They are generating record results on top of really strong results a year ago in Q4. Our consumer business will be moving in the right direction, and we're seeing that. We're taking actions to move it there. So you'll see a sequential quarter-by-quarter improvement. I would expect positive unit volume growth modestly there, and we've suffered some negative unit volume growth in the last couple of quarters, so you'll see good progress there. And you'll see improvements sequentially in our margins. I don't think we get back to positive EBIT and stronger margins in year-over-year in consumer until the first quarter of our new fiscal year, which starts on June 1st.

Great. And then in terms of the consumer business, you mentioned that your fill rates, I think last quarter you said fill rates were in the 50 to 70% range. You said they continue to be still a little bit low, but I think we're trying to get a sense of, you know, how much, you know, seasonal demand you're going to be able to meet and kind of where those inventory levels are as we head into the spring season.

So without getting into specifics, because it's different by product line and different by customer, but our fill rates are improving meaningfully week by week, and a lot of that has to do with the fill rate challenges we had in Q3 were related, as we talked about earlier, with the Omicron impact, particularly in our Rust-Oleum manufacturing facility in D.C. They're separate. They're very large facilities in Wisconsin. and availability of raw materials and packaging. There were also freight disruptions over the last two quarters that impacted fill rates as well. All of that is improving, and we're not going to be back to the levels that we want to be in Q4, but we're going to be meaningfully better than we've been the last couple of quarters, and I think that will be part of the sequential improvement that we expect to experience in our consumer group.

All right, and then last question for me is you mentioned in the press release that inflation and higher interest rates could be impacting consumer demand. Have you seen any evidence of that yet, or is that just kind of what Econ 101 tells you?

No, my comment was really an impact on M&A valuations. It's hard, you know, we compare the consumer demand both sequentially and year over year, but we're also looking back to some of the pre-COVID periods and And so it's somewhat of a challenge to get a good gauge on where the appropriate consumer demand is relative to the literally 30% or 35% unit volume increases we saw for about three-quarters in a row during the COVID period because of the stay-at-home orders. And so a consumer takeaway is solid, and we think that's continuing and will continue into the summer. I think we and our large customers believe that through COVID we expanded the base of confident DIYers, so we've got a larger base of regular consumers that we're excited about. Our problem has been supply. It's been raw material supply and a related product supply that's reflected in fill rates that have been below where they need to be.

All right. Thanks very much.

Thank you. There are no further questions at this time. I would now like to turn the call over to Mr. Frank Sullivan for closing remarks. Thank you.

Thank you very much for your participation on our conference call this morning. We are looking forward to continuing to build momentum and positive growth into our fourth quarter of fiscal 22 and to a really strong start to our new fiscal year. We look forward to providing you details of our fourth quarter results in July when those are released. as well as an outlook both for fiscal 23 and some longer-term goals that we've been working on for quite some time. I am grateful to the RPM associates who have generated a return to record sales and record earnings despite all the challenges that we've faced, and we appreciate everybody's investment in RPM. Thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.