David Huang: I guess first in your project businesses in Construction and Performance Coatings. Can you talk about the competitive dynamic here. I think a lot of your peers indicated they’re interesting further expanding the U.S. construction and manufacturing markets. I guess, do you expect any competitive pricing in the next few quarters where we could see some negative pricing for your businesses?
Frank Sullivan: Broadly speaking, we’ve done a really good job of maintaining pricing. There have been a few exceptions, certain more commodity-like silicone sealants, where the underlying silicone chemicals have dropped dramatically from their peaks. It’s been one area. There’s been a few areas in our Consumer Group, where we literally bumped into some price elasticity and our understanding price levels on products that are interesting points in terms of continuing to drive Consumer takeaway. We’re not seeing roughly speaking, with the exception of more commodity-type chemicals that have peaked dramatically a year ago, 1.5 years ago and have come down significantly since. Other than those areas, we’re not seeing significant price reductions.
I will tell you that the — and you can read this, the level of inflation has dropped dramatically and we are seeing a stabilization of raw materials for the most part. And there are some commodity chemicals that have dropped meaningfully and that’s the one area where we have also dropped some prices while still maintaining pretty good margins. Inflation is happening in a few categories, as I mentioned, in conversations about our comments about our Consumer Group and inflation is continuing at a more moderate pace but still up when it comes to salaries, benefits, hourly wages and categories like insurance.
David Huang: And then, I guess on fixed cost absorption. I think last year, in Q3, you had $20 million headwind. I guess, at the company level, is there additional headwind this quarter? And I guess assuming you’re closely be done with inventory rightsizing and assuming sales volume to be flat next year. What kind of leverage, I guess, would you have from fixed costs in FY ’25 versus FY ’24?
Frank Sullivan: Yes, I’d like to have Rusty Gordon answer the question about absorption and its impact on us now and the inventory reduction programs that we have been pursuing internally pretty aggressively, its impact on results and how he thinks about that. Rusty?
Russell Gordon: Yes, sure. We have, again, suffered from poor absorption, David, especially in our SPG and Consumer groups where volumes are dropping. On top of that, like Matt mentioned, we dropped our working capital ratio year-over-year by 580 basis points, much of that through inventory which you can see on the balance sheet. So that’s continued. And you can really see in our PCG and CPG results where volumes are growing, the kind of leverage we get. We’ve still gotten great leverage in the Consumer segment due to a lot of their MAP activity and that will continue to help RPM through this under-absorption issue but really pronounced at SPG and Consumer.
Operator: Our next question comes from John McNulty from BMO Capital Markets.
John McNulty: So I wanted to dig into Consumer a little bit. So it looks like you’re on pace for basically a record margin for the year in Consumer and that’s despite a pretty tough demand environment. So I guess, how should we think about the levers that you can still pull around some of the MAP improvements and the efficiencies there as we look kind of going forward over the next 12 months? Or is the next step up in margin really going to be completely dependent on the volumes picking back up and kind of getting back to more normalized Consumer takeaway? How should we think about that?
Frank Sullivan: Sure. I’ll provide some comments and maybe Rusty has a few thoughts as well. First of all, I don’t believe we’re at record margins for our Consumer Group. Those were achieved during the COVID period. And so — even pre-COVID, I think we’ve got some ways to go. Our Consumer Group was hit the hardest by raw material inflation given some of the metal packaging and some of the chemical raw materials they deal with. And that has been a challenge. We are seeing significant leverage. We’re at the point where price and commodity cycle are benefiting us the most, although we’re starting to see some raw material pickups like acetone that I mentioned. So that’s a head scratcher. But the leverage and improvements that we’ve achieved in our Consumer segment has been significant.
I mentioned on our prior call that we have uncovered tens of millions of unit and excess capacity just through efficiency. We are doing something pretty unique because of the significant improvements in Consumer. Historically, on the asset base we have, we would build inventory in February and March for the spring and summer months. In fact, last year and this year, internally, we’re continuing to reduce inventory as we’ve developed a much more efficient operation that can meet supply and demand. Our fill rates are back up to the high 90% range. And so the improvements we’ve made there are really impressive and really dramatic. And you sure can’t see them when your unit volume is declining in the low single digits. So when we get back to positive unit volume growth, I think you’ll see the benefits of the MAP initiatives that are as meaningful at Consumer as they are, for instance, the Construction Products or Performance Coatings.
But because so much of the benefits are tied to manufacturing efficiencies, they don’t show up until you sell something.
Russell Gordon: Yes, that’s right, Frank. A lot of the MAP savings have been masked and under-absorption has been pronounced at Consumers since volumes have been declining. There’s at least 200 basis points a quarter, I could point to this year for the impact of under-absorption caused not just by lower sales volumes but the conscious effort to reduce inventory.
