Frank Sullivan: Hi, John.
John Roberts: Thank you. It sounds like M&A discussions are picking up. Can you provide some color on whether it’s in the weak areas like Europe or Construction Products or is it broad based across your businesses?
Frank Sullivan: It’s kind of broad based across our businesses. We have done six transactions this year, all very small product lines. But there have been some nice additions to Construction Products. Through some of the big construction product mergers, we were able to pick up pieces of concrete, I am sorry, of cement additives, which was a category that Euclid Chemical was not in. We have also invested internally and through some regional acquisitions and penalization for greater energy efficiency and wall construction. So some exciting areas for us, small acquisitions that with our distribution should be able to double or triple revenues in the coming years. So, that’s pretty much what we have been seeing. As Matt commented on, we have been holding our discipline and we are seeing valuations coming down, and I suspect that we will continue to see small to medium-sized acquisition activity in the coming quarters.
John Roberts: And then how much more price do you need to get to fully get caught up on alkyd silicones and metal containers?
Frank Sullivan: I think we have the price that we need now in the marketplace. I think the final straw of margin recovery is going to come through holding on to the price that we have got as raw materials cycle back to more normal cost levels. And when you look at our Consumer Group, the year-over-year improvement in EBIT is impressive. It has as much to do with how poorly we performed a year ago as it does today. We are still not back to record EBIT levels, but we expect to get there both through some commodity cycle recovery and the benefits of the MAP 2025 Program.
John Roberts: Thank you.
Operator: And our next question will come from Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.
Frank Sullivan: Good morning.
Aleksey Yefremov: Thanks, and good morning, Frank, and everyone. I wanted to ask about the bidding activity that you see mainly in Construction Products and Performance segments, more maybe looking over the next two, three quarters, perhaps, outside the residential projects area where you highlighted the weakness?
Frank Sullivan: Sure. So the — as you would guess and you are seeing in the numbers in our results, the residential piece has been weak and Europe has been weak. We have a very strong backlog in our roofing and waterproofing division going into the spring. And so as we sit here today, it looks like the spring and summer season for that portion of our Construction Products Group, which is the largest and most profitable will be strong, but we will see. Again, the volatility that we are seeing in different parts of our business, it’s hard to understand how much of some of the underperformance here that we are expecting in Q3 is inventory destocking across customers and adjustments and/or weather related here as we start the quarter versus recessionary.
As we sit here today, we have a very strong backlog and I think there’s some comfort in the fact that unlike residential construction or normal commercial construction, there’s been a lot of federal money and state and local money that will be going into school construction, into healthcare, and those are two very strong end-use markets for our roofing waterproofing division.
Aleksey Yefremov: Thank you. And then I understand it’s hard to differentiate between demand weakness and destocking, I mean, customer side, but your intentional reduction of inventory, is it possible to estimate how much that’s hurting EBIT in the third quarter?
Frank Sullivan: Yeah. It’s a good question and it’s definitely a drag on EBIT. We have dropped shifts in certain places where we had previously been operating on a three-shift basis and that was not demand driven. That was inventory adjustment driven. And when you do that, your overhead absorption takes a hit and so that’s temporary and you are seeing that in a number of places across RPM. So there’s a deliberate effort to get inventory levels in a number of our businesses back to a normal pace and that will hurt us in the seasonally low third quarter as these actions again negatively impact overhead absorption. I’d like to think, I don’t know how quickly we will adjust it will be adjusted through the spring and the summer selling season, which are our strong seasons and so those temporary negative impacts on gross margin should pick back up.
Aleksey Yefremov: Got it. Thanks a lot, Frank.
Frank Sullivan: Thank you.
Operator: And our next question will come from Steve Byrne with Bank of America. Please go ahead.
Steve Byrne: Yeah. Thank you. How much of your MAP 2025 would you say is driven by targets on the manufacturing side versus initiatives on commercial improvement? And in the former, do you expect to get more active in raw material manufacturing and in the latter view, is it more driven by cross-selling?
Frank Sullivan: So it’s mostly, Steve, focused on areas that would affect gross profit and so it is a continuation of what we call MS 168, which is driving lean manufacturing disciplines on a consistent basis across our manufacturing base. We had in our original MAP program, done so very effectively but really in our top 50 plants and there’s another 75 plants out there that are more small- to medium-sized our ability to get to effectively was interrupted by COVID and so that’s having an effect. There will be some modest plant consolidation, nothing to the extent of the original MAP program, but some modest plant consolidation and so those are two big areas. Then the other area is literally being in a position today to use data much more effectively to understand cost price mix better and to be able to drive a more deliberate margin profile that we want relative to really not having that data all the way down to a salesperson level such that we can really be deliberate and effective there.
And so those are the primary areas that will affect principally gross profit margin.
Steve Byrne: And I asked
Frank Sullivan: You have other — yeah. The last piece of that we talked about is, we do expect somewhere between $100 million and $200 million of gross margin recovery from commodity cycle improvement as well, which is consistent with the margin recovery that we have had in past commodity cycles and in reference to a response to an earlier question.
