Q3 2022 RPM International Inc Earnings Call
Welcome to RPM Internationals 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 Dot R. P. M I N C dot 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 differ materially.
For more information on just the risks and uncertainties. Please review Rpms reports filed with the FCC.
During this conference call references maybe 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.
Following today's presentation. So it'll be a question and answer session. That's much time, if you wish to ask a question you will need to press Star then one on your telephone.
Please note that only financial analysts will be permitted to ask questions at this time.
I'd like to turn the call over to Rpms, Chairman and CEO , Mr. Frank Sullivan for opening remarks. Please go ahead Sir.
Good morning, welcome to the RPM International Inc, Investor call for our fiscal 2022 third quarter.
Joining me on today's call is Rusty Gordon Rpm's, Vice President and Chief Financial Officer, and Michael Roche, Our Vice President controller, and Chief Accounting Officer.
I'll share broad commentary on our consolidated performance for the quarter, Mike will provide details on our financial results and Rusty will conclude with our formal remarks, and our outlook for the fourth quarter of fiscal 'twenty, two 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.
We provided a supplemental slide presentation to support our comments on this call. It can be accessed in the presentations and Webcasts section.
Of the RPM website at Www Dot RPM I N C dot 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 OMA crime 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 leverage selling price adjustments and operational improvements to the bottom line.
Our consumer group was the outlier.
Nick will discuss this in more detail when he presents our segment results.
With our primary raw material cost up more than 40% on average versus a year ago, our consumer group will need to catch up with significant selling price increases, which fleet, which will be instituted at the end of this month.
We have been faster respond to supply chain challenges by quickly scaling up in house RASM production manufacturing facility, we acquired in September .
Additionally, due to our ongoing investments in the fastest growing areas of our business our high performance building construction and coating systems have generated accelerated growth.
Construction and industrial maintenance activity is robust and energy markets have recovered while consumer takeaway remains strong.
Two to three years of extraordinary work by our associates to implement our map to growth operating improvement program. We have made 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, our operating not only at record sales and EBIT, but at record margins in the in the third quarter.
Our specialty products group is trending towards the same performance with record results in sales and EBIT and improving margin performance.
And we are making good progress in our consumer business.
In short, we are playing offense, almost everywhere investing and accelerating organic 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 would now like to turn the call over to Michael Roche to discuss our financial results in more detail.
Thanks, Greg and good morning, everyone.
During the third quarter, we generated consolidated net sales of 143 billion, an increase of 13% compared to the $1 $2 7 billion reported during the same quarter of fiscal 2021.
Organic sales growth was 13, 4% or $171 million.
<unk> contributed one 4% of sales or $17 $8 million, while foreign exchange was a headwind of decreased sales by one 8% or $23 4 million.
Adjusted diluting diluted earnings per share were <unk> 38.
Which was unchanged compared to the year ago quarter, our consolidated adjusted EBIT was up <unk>, 8% to a record $86 million compared to the $79 9 million.
In the fiscal 2021 third quarters.
On a double stack basis, comparing in fiscal Q3, 'twenty to the pre pandemic Q3 of FY 'twenty sales EBIT adjusted EBIT net income diluted EPS and adjusted diluted EPS, all achieved double or triple digit growth.
Similar to the first and second quarters of fiscal 'twenty two.
Our third quarter performance 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.
<unk> sales in these three segments increased 19% while sales in the consumer segment were up modestly.
Again after removing consumer the remainder of RPM produced exceptional adjusted EBIT growth of 97%.
Our consumer group continued to be disproportionately impacted by inflation as well as valuable mccur unrelated labor and supply chain disruption, particularly during December and January .
This instability in supply caused inefficiencies.
<unk> continued to negatively impacts conversion costs, resulting in a decline in adjusted EBIT at our consumer group for the fourth consecutive quarter.
Later in the call we will discuss the actions we're taking to address these challenges affecting this segment.
Our construction products group generated third quarter record net sales of $482 million up 21, 7% compared to the fiscal 2021 third quarter.
Organic sales growth was 23, 2% and acquisitions contributed two 2%.
Foreign currency translation headwinds reduced sales by three 7%.
CPG record revenue growth was largely due to the segment's ongoing success in promoting its differentiation differentiated restoration solutions, which offer particular advantages versus new construction, given the current raw material and labor shortages.
These same challenges have continued to help speed the adoption of the segments innovative building envelope products.
Cpg's fastest growing businesses, where those providing roofing systems insulated concrete forms commercial ceilings as well as concrete admixtures and repair products.
The segment's international operations generated strong topline 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.
<unk> growth and operational improvements.
All of these factors combined with selling price increases helped to offset higher raw material inflation.
Our performance coating group's fiscal 2022 third quarter net sales were a record $279 million, an increase of 19, 6% over the year ago period.
<unk> sales increased 17, 8% and acquisitions contributed three 4%, which were partially offset by foreign currency translation headwind of one 6%.
PSEG continued its momentum with all of its north American business is generating double digit organic sales growth.
Pseg's businesses, serving emerging markets generated explosive growth and its European companies continued their steady rebound.
Driving its strong topline were increased.
Industrial maintenance spending.
Covering in energy markets and price increases.
<unk> best performing businesses, where those providing pulp 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 increase as a result of volume growth operational improvements and a more favorable product mix. Additionally, adjusted EBIT margin was a third quarter record.
Especially products group reported record net sales of $189 $4 million during the third quarter of fiscal 2022, an increase of 11, 9% compared to the fiscal 2021 third quarter.
Organic sales increased 11, 9% and acquisitions added <unk>, 8%, which were offset by unfavorable foreign currency translation of <unk>, 8%.
SPG generated record sales as a result of strong performance at nearly all of its businesses with the highest growth coming from those serving Oems and food additive markets no.
Edition. This segment sales of disaster restoration activity rebounded after securing a supply of semiconductor chips and reconfiguring its products to accommodate.
This is an example of how our businesses quickly adjust the challenges demonstrating a key advantage to rpm's entrepreneurial culture.
This business did face a tough comparison to the prior year period when demand for its restoration equipment was inflated because of winter storm Yuri.
Adjusted EBIT was a record $26 6 million in fiscal 2022 third quarter, an increase of five 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 and.
An increase of two 9% compared to the third quarter of fiscal 2021.
Organic sales increased three 6%, which was partially offset by unfavorable foreign currency translation of <unk>, 7%.
As we anticipated the segment grew revenue in part due to its ability to mitigate the severe alkyd resins shortages experienced by leveraging the new Texas manufacturing facility, we acquired in September .
During the third quarter sales and productivity were challenged by unreliable shipping and supply, resulting from labor shortages caused by the omicron barrier, particularly in December and January .
Speaking of challenges the consumer group also face 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 first phase.
Fiscal 2022 third quarter adjusted EBIT was $17 2 million a decrease of 63, 9% compared to adjusted EBIT.
$47 8 million reported during the prior year period.
Due to the nature of its products in the markets. It serves inflation has been more impactful on our consumer group that rpm's other segments and raw material inflation in particular.
Has had the most significant impact on EBIT.
Partially offsetting these factors were price increases and operational improvements as a consumer group is currently investing in capacity and process improvements to meet customer demand as well as build resilience and 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 to fund internal growth initiatives make acquisitions reward our investors with cash dividend payments and repurchase our shares helping to keep our liquidity strong is it $300 million bond offering we completed in January .
Also during the third quarter, we repurchased $15 million of our common stock now.
Now I will turn the call over to Rusty to discuss our outlook.
Thanks, Mike.
Sure.
For the fiscal 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.
All her role 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.
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 fiscal 2022 fourth quarter consolidated sales growth.
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 growth in the low teens and all four of our operating groups. As a result of strategic investments, we are making to capitalize on market opportunities and industry trends.
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 pressures, which have a greater impact on the consumer group than rpms others 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.
Thank you as a reminder to ask a question you will need to press star one on your telephone again that is star one to ask a question to withdraw your question Jess <unk>.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Frank Mitsch from Fermium Research. Your line is now open.
Good morning, Thanks, Good morning, Hey, good morning, Frank.
You mentioned that the raws and some of your primary materials were up 40% plus in the third quarter that was significantly up from what it was in the second quarter can you talk about.
You see that trending what is most particular concern for you in terms of raw material availability.
Sure I can give you. Some examples I think Frank first of all we were starting to see some.
A flattening out of raw material prices in certain resins and other categories.
Oil related items until the onset of 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 will be in the fourth quarter I can give you some specifics.
Just to put things in context for instance, even consumer aerosol cans year over year, we're up 66%.
Alkyd resins were up 113% acrylic latex is up 41% monomers are up 86.
More appropriately to our industrial.
Product lines Apache resins year over year up 72% and up 106.
And so it's a litany of sad.
Higher increases in critical raw materials.
We had seen a significant improvement in availability.
Most of the forest not all but most of the forced measures that had been announced over the last.
15% in 12 to 15 months had been.
Rescinded.
But once again, we're anticipating some challenges in certain resins, particularly some bio base resins.
We source in euro.
And from India.
As a result of the disruptions from the framework.
Got you got you so.
You did mentioned a couple times on the call that you are implementing price increases you're continuing to implement price increases how do we think about when.
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 youre looking at sales in the fiscal fourth quarter up low teens.
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.
And so you can see when you look at the organic growth, we had tremendous organic growth.
In our construction products group and our performance coatings group.
A modest mix.
Would appear flat and especially products group that was a mix of.
Some organic growth in certain units and others not and when you do the math, you'll see that we had actually unit declines in the quarter in consumer.
That was as much a result of the manufacturing and operating disruptions raw material challenges.
As demand remains pretty solid there as we think about the fourth quarter as Rusty indicated.
We've got really good momentum going into Q4, we would expect to continue to operate at record levels of sales EBIT and EBIT margins in our construction products group performance coatings 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 finished the quarter in consumer.
As we sit here today in Q4 price will add about 12, 5%.
In terms of revenues.
But as Rusty indicated we are going out with another round of price increases.
Across a number of product lines, and RPM, where appropriate but in particular in our consumer group at the end of this month in relationship to both being impacted the most directly.
By raw material cost and packaging cost being small project draw.
Driven in paints and patch repair and Cox 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, Alright.
Thank you.
Your next question comes from the line of John Mcnulty from BMO capital markets. Your line is now open.
Yes, good morning, and thanks for thanks for taking my question, Hey, Frank and great job in a really tough a tough environment.
I guess I wanted to dig into maybe two areas. The first one would just be on on the alkyd situation I know, it's been a really tough overhang for you guys for the last call it three quarters or so it sounds like you've got some of that remedied with the Texas facility up and running I guess, how should we think about how that takes some of them.
The pressure off the consumer business. It seems like Theres a lot of other moving parts, but I guess, how much does that flip the switch where things get noticeably 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 is 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 timeframe that would drew.
Supply from the marketplace.
So it remains a.
A challenging environment, let's say.
And.
Sure.
The alkyd situation as a particularly critical raw material for our consumer group.
Got it so you've got your asset running but it sounds like somebody else actually took more capacity out. So maybe it's helped but not not as much as as it otherwise could have is that right Thats correct got.
Got it Okay, and then on the construction business. The volumes are really they're seeming like 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 that gives you better.
Our visibility.
Around that business, so I guess, how far out in terms of line of sight do you have around the business trends that youre seeing there.
So I would tell you that the light of sight anywhere isn't very good relative to all the dynamics in the marketplace.
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 were rounding now.
<unk>.
I think the 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 single digits on an organic growth basis.
Can add about 12%.
In terms of sale price impact to that.
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 will interrupt at at this point.
Got it perfect. Thanks, very much for the color.
Yes, I would add one more thing to that John .
Whether it's in our new Dura ICF or 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 and new Dura.
The first elements of which will go into effect at the end of the fourth quarter and through the summer and we have a significant capital expansion and a roof restoration coatings, which should rollout throughout the balance of this calendar year.
Got it can you actually just as a follow up to that can you help us to understand how much capacity that might unlock.
I can tell you in roof restoration coatings, probably another 50 or $100 million and new <unk>.
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 'twenty three.
Wow, Okay, so pretty pretty notable okay. Thanks very much for the color that's really helpful.
Your next question comes from Atlanta, Ghansham Panjabi from Baird. Your line is now good morning Ghansham.
Good morning, Frank.
Thanks for putting me in.
Given that.
Europe is a pretty significant end market for RPM can you just kind of comment on current operating conditions post the war.
And also anything that you may be seeing in China at this point, just given the lockdowns 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.
A big slug of business, there and the business that we do have is driven by our industrial.
The 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 certainly and 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.
<unk> activities in Russia, we don't have any manufacturing business. There. The business. We do have is relatively modest so it's about five or $6 million on an annualized basis.
And we both felt it was the right thing to do and.
Certainly wanted to respond to concerns that a significant number of our.
Our workforce and European manufacturing and distribution of.
Of Ukrainian descent and so.
That's the impact on Russia, and Russian worn Ukraine.
But in general were heightened of kind of anticipating impacts, but we haven't seen it yet.
Okay. 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 Youre seeing in that end market from a recovery standpoint.
Yes post COVID-19 .
Sure.
Sure.
Our energy exposure is mostly in our performance coatings group.
And mostly in <unk> lines for the performance coatings group, Let's say is about a 1 billion won.
And carbon line in stone hired are by far and away the two largest business units there.
I would guess directly and indirectly and now youre talking broadly oil and gas and refinery and pipelines and things like that probably $300 million or so of exposure to oil and gas markets broadly.
The.
Again as you can see we had high teens organic growth.
High single digit unit volume and there is somewhat higher.
Growth in that business than average.
And those businesses or product lines that are exposed to energy markets and we see that continuing so there is a.
A little bit of a double edged sword in that it is driving.
A significant increase in capital spending and business for us and our industrial segments.
So driving a significant increase in our raw material costs as well so.
Fantastic. Thanks, so much.
Thanks Daniel.
Your next question comes from the line of Steve Byrne from Bank of America. Your line is now open.
Good morning.
Good morning.
You have this intermediary between you and your customer and your consumer segment and I. Just was curious what is the process that you go through to get price in the consumer segment is that is there.
The delay is that negotiation is that represent.
A bigger challenge for you then 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.
It varies a little bit not a lot.
And we.
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 it will.
We will be announced at the end of this month.
And Frank you mentioned labor shortages. In this segment is that is that your or is that is that RPM employee labor shortages is that your customer or distribution channel.
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 OMA crown in terms of either people that were out infected.
<unk> people that were quarantined because of exposure and so it had a disproportionate impact on our consumer business, particularly resto Liam we also saw it in our consumer business with the just in time.
Traditionally just in time freight delivery of raws 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 OMA kron on freight availability and truckers and so that impacted this segment as well.
In the last month of the next quarter or are you seeing things improve for you.
Yes, we are in that 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.
Yes.
The omicron spike both across RPM, we track we've been tracking.
Quarantine and infections and.
Covid literally from March of 2020 every week.
Neil Mccann Spike was shockingly quick tie 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.
The worst of Covid is behind us it seems like if COVID-19 isn't done with America Americas done with Covid. So.
Very good thank you.
Thank you.
Your next question comes from the line of Vincent Andrews from Morgan Stanley . Your line is now open.
Good morning, Jay This is Steve Haynes on for Vincent Thanks for taking the question.
So can I ask a question on cash flow operating cash is down about $500 million year on year through the first nine months.
Firstly on working capital So could you just talk a little bit on.
You're thinking about operating cash generation for the full year, and if youre expecting kind of a big release of working capital in the fourth quarter.
Sure.
<unk> operating cash flows were negatively impacted by working capital largely driven by supply chain issues, we've been discussing.
Inflation quite honestly.
We expect this 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 and 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 a way you can.
Maybe size like I guess the cumulative impact.
Throughout the full year, so far and just so we can get an idea of like what the upside is when ultimately that begins to reverse.
Sure.
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.
Consumer the.
The vast majority of that EBIT margin decline as 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 our material you related and about one third is operating efficiency.
And throughput in our plants and so.
We fully expect in all of our businesses as we get back to normal.
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 of years ago that that one third impact on our margins would be recovered.
Balance is literally a cost price mix dynamic, which we are managing better and 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. Your line is now open.
Good morning, Kevin Good morning, how are you good.
Good with regard to your performance coatings segment, you said in your prepared remarks that you were seeing explosive growth in emerging markets that word explosive got my attention. So I was wondering if you could kind of talk through where youre seeing the strongest growth in.
What exactly is driving that is it.
Do with.
Maybe some of the acquisition activity that you've done or more organic in nature 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 is a really good.
Both cooperation between our performance coatings group and our construction products group to too.
Groups of RPM that had the greatest international exposure in the greatest.
Developing world exposure and and a real focus on driving organic growth and investing so we're seeing significant growth in India significant growth in Africa, and the Middle East and 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 of 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 its 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 was much broader in nature. If I look at slide 11 of your deck you are.
Our sales forecast for the fourth quarter is extremely uniform across all of your segments. They are 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 but.
Sitting here today, how would you expect those trends to diverged moving forward.
Do you have in your mind.
A segment that you would expect to grow materially faster than the others or were slower at the other end of the spectrum.
So I think two comments on that Kevin one is I think the furthest out we can really see is it a quarter or two so 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're seeing in our performance coatings group and construction products group will continue.
<unk> products group should be back to.
Record margins, not just higher sales and earnings and we will see solid recovery in consumer both on the topline and Bottomline in part because of the actions. We're taking are taking hold in part because of the disruptions of COVID-19 .
Our being put behind us and in part because we'll be rounding some easier comps and consumer so you ought to see record results in Q1 for RPM on 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 'twenty three.
And we will 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 grow two point something.
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-19 and supply chain challenges that.
That will.
Working their way into something more normal and stable until the Russian worn Ukraine, and so I think that's the.
<unk>.
Caveat here, we're not seeing much of an impact on our European business yet.
But time will tell and in coming months is to.
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 the line of Arun Viswanathan from RBC capital markets. Your line is now good morning Arun.
Good morning, Frank Thanks for taking my question I hope you're well.
Yes, so I guess I just wanted to understand.
The low teens guidance.
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 kind of your volume versus price.
Dynamics.
Sure I think particularly in performance coatings and construction products we're expecting.
A mid to upper unit volume growth.
And the continuation of whats been about 12% 12, 5% on average price increase so you could see results.
On an organic basis.
Mid to high teens, that's going to be knocked down a little bit by the strengthening U S dollar, which will take a couple of points off our results. So I think an overall mix certainly possible that we will continue mid teen performance in some of the industrial businesses and would expect to see kind of a low.
A low teens kind of a 10% 12% ish.
In consumer.
Yes.
And so thats, where we are it will 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 effect.
Stronger recovery there.
Okay. Thanks.
I guess I also wanted to just follow up on a comment you made earlier as far as <unk>.
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 and.
Has that moderated now it does appear that you know.
Some of the energy price impact since has started to moderate as well.
Would you say that that's the case and do you see that business kind of a longer term impact or is it just.
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 <unk>.
Direct purchase raw materials.
And all of that reversed with.
With the Russian.
<unk> in Ukraine and.
Really who knows and I am not trying to be cagey here. If 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.
Are impacting that we purchase principally from India, but they've spiked up for four reasons.
No.
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 and have reversed and otherwise positive trend.
Great. Thanks, and then lastly, if I could just ask about the M&A strategy.
I know that there was a greater focus on map to growth.
Over the last couple of years, but are you finding yourselves getting back into the inorganic market as well how would you characterize the environment there and if theres any focus what areas are you focusing on and how are you seeing valuations.
Sure.
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 an extraordinary prices.
In.
I think that youre going to see some mitigation in valuations as interest rates rise in inflation.
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 face of <unk>.
Significant raw material costs I can tell you.
Rusty, Matt Ratajczak, Michael Roche Rusty's team.
Did a 10 year bond at the end of January .
And we're able to capture a 295% coupon and if we turned around and do that bond today, it would cost us four in a quarter or more.
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 the line of Josh Spector from UBS. Your line is now open.
Yeah, Hey, Thanks, Hey, good morning, Frank.
Thanks for taking my question just a clarification first off just on the raws inflation. Thanks 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 and cost.
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 thats materials and packaging it does not incorporate frey.
Freight or.
Labor, which are also up 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.
Our up 113, our alkyd resins, 113%.
Aerosol cans were up 66%. So that's really specific to restore Liam and so they have they have some higher outliers in relationship to their the small packaging nature of our consumer businesses.
And the <unk>.
Disproportionate impact of acrylic resins and consumer versus the rest of our businesses.
Okay. Thanks, that's helpful.
Just a specific question on Europe , and specifically the performance segment.
Pakse producer earlier shut down some capacity in the region and part of that decision was related with lower demand that seems a bit counter it 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 Apache resin costs for us are up 70% year over year. So thats.
<unk>.
It had been a good thing.
We have been able to pass on price there was reference earlier.
Our ability to provide supply and apply which is benefiting us but within a lot of our roofing businesses as well as the stone hard.
Flooring business and so thats been an advantage for us.
Apache resins, and some of the intermediate chemicals, and new Apaches 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 line of quick from Jpmorgan. Your line is now open.
Good morning Silke.
Good morning, how are you.
Good thank you.
Last quarter, you said that.
We added 200 million dollar headwind from loss.
Due to the raw material shortages, and maybe $100 million of that listen that consumer.
Segment.
<unk>.
Palomar West.
This quarter.
Omar.
What do you think you might.
Brian .
And how do you think about 'twenty three.
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 of our business, whereas 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 in <unk>.
Impact in Q4 equal to what we saw in Q1 and Q2, just because Q4 is a significant.
Significantly large quarter for us as we build into a construction season.
We build into a consumer DIY season, particularly for exterior use products. So 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 understood. It right, maybe it's like what of back into it 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 on Ukraine.
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 a 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 .
Okay.
And my second question.
Yes.
On resin.
This drop your cost of goods sold basket.
Fox your resin resin.
Chronic resin if you add it all together.
Where did your raw material costs.
It goes in that.
What percentage can you make in house now or maybe like what how much can you make next year given the.
Yes, yes manufacturing capabilities you acquired.
Sure Yeah in terms of our residents theres not one resin.
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 <unk>.
Of in House production, we are supplementing as we've talked about in the alkyd resins.
That's a nice facility in Texas to absorb shocks in 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.
And the last couple of in the last couple of months as well, which was unexpected and something we're adjusting to.
Okay.
In Turkey.
Savings program are there any measurable savings from that.
But I would like the map program that.
That you saw in the quarter, whereas all of that.
Hi.
It is always good luck with raw materials, so whether any measurable savings you can quantify that you've gotten from the map program by incremental year over year.
As best we can calculate in the quarter roughly about $15 million.
And I will and I will tell you that the ability of the construction products group and performance coatings group to recover in this environment.
To record levels of EBIT and EBIT margin.
As Scott has much to do with the efficiencies from our operating improvement program as they do from a cost price mix.
So it's been hugely Ben 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.
Just on the web.
Isn't it.
PPG expanded its relationship with home depot.
Hi, Morris.
<unk> constant pain.
And when you look at your market share at home depot, and generally a big box retail business.
Do you think your share is like you know flat up or down can you tell.
Yeah.
I don't think we have lost any market share.
And there is 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 as supply.
And so.
We pride ourselves on fill rates of 90, 899%, where we operated for a long time.
And as a result of both the COVID-19 disruption to supply chain challenges fill rates have been significantly lower.
And.
And Thats been a challenge for us for others in our industry and quite candidly. When you go to one of the big retailers for people and a lot of place.
Places so the challenge is.
Supply relative to raw material availability and costs and COVID-19 related disruptions much more so than.
Market share challenges at this point.
Sure.
Our expanded capacity in our consumer businesses to make sure as we put these disruptions behind us that we can get back to those high.
High fill rates and maintain market share and growth.
Yeah.
Okay. Thanks very much.
Thank you.
Your next question comes from the line of Mike Sison from Wells Fargo. Your line is now open.
Good morning, Mike.
Hi, This is actually Richard on for Mike.
So first question you didn't mention that Russian division had a meaningful impact on the supply chain. Obviously is that comment based on just the higher derivative price for oil.
Products or.
Is there a specific products, which may not be.
Available in terms of the supply chain, such as CIO to or otherwise.
Yes, we have not seen.
Availability issues.
Sure.
Directly, but we saw a pretty quick reversal in what seemed like stabilizing prices and.
And some basic commodity chemicals, some trends that we're moving in the right direction that would.
Suggest that maybe our raws would be stabilizing or perhaps over time going down in that reverse very quickly and so it's obviously oil 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.
Scheu base resins that soybean 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.
Yes.
Okay. Thanks, and then just a follow up.
On the EBIT.
Guidance low teens.
Across the board.
Can you give us some color in terms of where you see the most growth from the on the EBIT side and obviously for.
For consumer.
Do you expect.
The 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.
<unk>.
We appear to have a disconnect and I believe were back.
Live on the conference call.
And so operator, if there are any additional questions, we will 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.
Mike.
Hey, good morning.
Maybe just.
I guess close a loop on the last question that was asked.
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 if the consumer business do you expect EBIT there to be up on a year over year basis.
So I would tell you that our.
<unk> products group performance coatings group.
We have an opportunity to outperform that low teens between.
Between price and unit volume that will be somewhat mitigated by FX given the strength of the dollar but.
We see good momentum there continuing in both.
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 youll 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 youll see improvement sequentially in our margins.
I don't think we get back to.
Positive EBIT.
And stronger margins in year over year and consumer until the first quarter of our new fiscal year, which starts on June one.
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.
Said, they continue to be still a little bit low, but I think we're trying to get a sense of.
How much.
Seasonal demand youre going to be able to meet.
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 the fill rate challenges. We had in Q3 were related as we talked about earlier with the omicron impact, particularly in our <unk> manufacturing facility in DC. There are separate to very large facilities in Wisconsin.
And availability of raw materials and packaging that we're 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 in 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.
Alright, 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 you're kind of in 101 tells you.
No my comment was really the impact on M&A valuations.
It's hard.
We compare the consumer demand both sequentially and year over year, but were also looking back to some of the pre COVID-19 periods.
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-19 period because of the stay at home orders and so consumer.
Consumer takeaway is solid.
And we think that's continuing and will continue into the summer.
I think we in our large customers believe that through Covid, we expanded.
The base of confident Diyer, So we've got a larger base.
Regular consumers that were excited about our problem has been supply it's been raw material supply and related products supplied its reflected in.
Fill rates that are that have been below where they need to be.
Alright, 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 'twenty, two 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 'twenty, three 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 faced.
And we appreciate everybody's investment in RPM, Thank you and have a great day.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
[music].
Okay.
[music].
Yes.
Yes.
[music].
Okay.
Yes.
Sure.
No.
[music].
Okay.
Yes.
[music].
Sure.
Okay.
[music].
Yes.
Sure.
[music].