RPM International : Fiscal 2024 Third-Quarter Conference Call Transcript

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EDITED TRANSCRIPT

RPM.N - Q3 2024 RPM International Inc Earnings Call

EVENT DATE/TIME: APRIL 04, 2024 / 2:00PM GMT

OVERVIEW:

Company Summary

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Frank C. Sullivan RPM International Inc. - Chairman, President & CEO

Matthew Schlarb RPM International Inc. - Senior Director of IR

Michael J. Laroche RPM International Inc. - VP, Controller & CAO

Russell L. Gordon RPM International Inc. - VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Aleksey V. Yefremov KeyBanc Capital Markets Inc., Research Division - Research Analyst

Arun Shankar Viswanathan RBC Capital Markets, Research Division - Senior Equity Analyst

Frank Joseph Mitsch Fermium Research, LLC - President

Ghansham Panjabi Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Jeffrey John Zekauskas JPMorgan Chase & Co, Research Division - Senior Analyst

John Ezekiel E. Roberts Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst John Patrick McNulty BMO Capital Markets Equity Research - MD & Senior United States Chemicals Analyst Kevin William McCarthy Vertical Research Partners, LLC - Partner

Lucas Charles Beaumont UBS Investment Bank, Research Division - Associate Analyst

Michael Joseph Harrison Seaport Research Partners - MD & Senior Chemicals Analyst

Michael Joseph Sison Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst

Stephen V. Byrne BofA Securities, Research Division - MD of America Equity Research & Research Analyst

Steven Kyle Haynes Morgan Stanley, Research Division - Equity Analyst

Yifei Huang Deutsche Bank AG, Research Division - Research Associate

P R E S E N T A T I O N

Operator

Good morning, everyone, and welcome to the RPM International's Fiscal Third Quarter 2024 Earnings Call. (Operator Instructions) Please also note that this event is being recorded.

At this time, I'd like to turn the floor over to Matt Schlarb, Senior Director of Investor Relations. Sir, please go ahead.

Matthew Schlarb - RPM International Inc. - Senior Director of IR

Thank you, Jamie, and welcome to RPM International's Conference Call for the Fiscal 2024 Third Quarter. Joining today's call are Frank Sullivan, RPM's Chair and CEO, who is dialing in remotely today; Rusty Gordon, Vice President and Chief Financial Officer; and Mike Laroche, Vice President, Controller and Chief Accounting Officer. This call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please visit RPM's reports filed with the SEC.

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments will be on an as-adjusted basis and all comparisons are to the third quarter of fiscal 2023, unless otherwise indicated. We have 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.rpminc.com.

Additionally, as a reminder, certain businesses in Asia Pacific that were previously part of the Construction Products Group are now being managed and reported under the Performance Coatings Group effective June 1, 2023. As a result, all references to CPG and PCG today reflect the updated structure. The recast businesses generate approximately $100 million in annual sales, and this change has no impact on our consolidated results.

At this time, I would like to turn the call over to Frank.

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

Thank you, Matt, and thank you to everybody for participating on our call today. I'll start with a high-level review of our third quarter results. Then I'll turn the call over to Mike Laroche to discuss the financials in more detail. Matt will then provide an update on the balance sheet on organic growth investments in emerging markets, and Rusty will cover our outlook for the balance of the year. At the end of the prepared remarks, we'll be pleased to answer your questions.

I'll begin on Slide 3 with our third quarter results. In addition to our strategic balance and focus on repair and maintenance, positive momentum with our MAP 2025 operational improvement initiatives continued in the third quarter, which generated our ninth consecutive quarter of record sales and EBIT results. Margins expanded, and we had our fourth consecutive quarter of record cash from operations.

During this trailing 12-month period, we generated $1,260 million in cash flow from operating activities far exceeding any previous 12-month period in RPM's history. Much of this has been driven by improvements in working capital, which has been a particular area of focus with our MAP 2025 initiatives.

Turning to Slide 4. Sales growth was led by our Construction Products Group and our Performance Coatings Group. These segments benefited from their focus on repair and maintenance as well as their ability to serve strong demand from infrastructure, reshoring and high-performance building projects with their engineered solutions. Favorable timing of some project completions, particularly in the Performance Coatings Group contributed to sales growth in Q3.

Due to challenging market conditions, volume declines in the Consumer and Specialty Products segments continued. Consumer was negatively impacted by lower DIY takeaway and retail customers who continue to tightly manage inventory levels, partially offset by market share gains. While volumes declined in the Specialty Products Group due primarily to challenging comparisons in the Legend Brands disaster restoration business, there were signs of stabilization in our core specialty OEM markets. As expected, pricing was positive in all segments as we catch up with inflation, including continued inflation in wages, benefits and insurance.

On a consolidated basis, pricing during the quarter was up approximately 1% quarter-over-quarter. We achieved record adjusted EBIT as our MAP 2025 benefit inclusive of the commodity cycle recovery drove a 170 basis point improvement in margins. MAP 2025 initiatives were a benefit to all businesses, particularly those that generated positive unit volume growth. It is imperative that throughout cycles we invest in initiatives to leverage our entrepreneurial spirit and generate volume growth that will allow us to fully realize the benefits from the MAP initiatives we have put in place.

Some recent examples include capacity expansions, increasing R&D spending through the establishment of our Innovation Center of Excellence and improving our data-drivendecision-making capabilities. We are also expanding our sales forces and training them to increase sales of higher-margin products as well as introducing new products such as DAP, one component wall and cavity spray foam which is helping us win market share this spring.

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

Moving to Slide 5. The positive momentum from improved coordination outside the United States continued in the third quarter, emerging markets led growth for the company as a result of RPM's heavy emphasis on engineered solutions for infrastructure investments in these geographies. In Europe, we are taking share with our focused sales strategy. After excluding the impacts of a divested business, sales in the region were roughly flat despite macroeconomic pressures in several economies. And our focus on implementing MAP 2025 initiatives in the region generated strong EBIT margin improvement.

Overall, I'm proud of our associates' continued commitment to our MAP 2025 program, which has consistently generated efficiencies, higher levels of cash flow and record results. We remain focused on expanding margins, accelerating organic growth and improving cash flow to achieve our MAP 2025 targets.

I'll now turn the call over to Mike Laroche to cover our third quarter financial results in more detail.

Michael J. Laroche - RPM International Inc. - VP, Controller & CAO

Thanks, Frank. Starting on Slide 6. Consolidated organic sales increased 0.9%, driven by positive volumes at Construction Products Group and Performance Coatings Group as well as higher pricing in all segments. FX was 0.4% headwind to revenue.

MAP 2025 benefits, including the commodity cycle drove adjusted EBIT margin expansion of 170 basis points, improved fixed cost leverage at Construction Products Group and Performance Coatings Group also contributed to better margins. As Frank mentioned, we are investing in initiatives to accelerate organic growth, and this contributed to an increase in SG&A during the quarter. Incentives to sell higher-margin products and inflation and wages and benefits also added to the SG&A increase.

We continue to selectively raise prices at businesses with the most pronounced inflationary pressures and took expense reduction actions at the end of fiscal year 2023 to help mitigate the SG&A rise.

Adjusted EPS increased 40.5% to $0.52, which was a third quarter record and was driven by the adjusted EBIT growth. Interest expense declined in the quarter due to a $629 million debt reduction over the prior year as a result of record cash flow, and this contributed to the adjusted EPS increase as well.

Now turning to the segment results. Starting with Construction Products Group on Slide 7. Third quarter sales were a record and growth was led by concrete admixtures, which continued to benefit from reshoring and infrastructure projects, including in Latin America. The segment also generated growth from increased demand for high-performance buildings and market share gains. The rise in adjusted EBIT was led by MAP 2025 benefits driving a favorable product mix and improved fixed cost leverage from volume growth.

On Slide 8, Performance Coatings Group achieved record sales, once again driven by the demand for engineered solutions serving reshoring projects, including favorable timing of some project completions as well as market share gains.

The businesses in Africa, Middle East and Asia Pacific that were recently aligned under the Performance Group -- Performance Coatings Group management contributed to the segment's growth driven by RPM's engineered solutions focused on infrastructure projects. Adjusted EBIT was a third quarter record, driven by sales growth, favorable mix and improved fixed cost leverage that was enhanced by MAP 2025.

Moving to Slide 9. Specialty Products Group sales declined primarily due to challenging comparisons to the prior year period for the disaster restoration business, when it benefited from the response to freeze-related flooding, which should not recur to the same extent this year. The divestiture of the noncore furniture warranty business also contributed to the sales decline. After several quarters of weakness, specialty OEM markets began showing signs of stabilization during the quarter.

The reduction in adjusted EBIT was driven by the sales and volumes decline in the disaster restoration business, which resulted in unfavorable absorption as well as the divestiture of the noncore furniture warranty business. SPG also continued strategic investments in long-term growth initiatives, which were partially offset by expense reduction actions taken at the end of fiscal 2023.

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

On Slide 10, the Consumer Group was pressured by weaker takeaway at retail stores from DIY customers, customers maintaining lean inventories and the rationalization of lower-margin products. Market share gains partially offset the decline in volumes. MAP 2025 initiatives and the rationalization of lower-margin products resulted in margin expansion, which was partially offset by under-absorption associated with lower volumes and higher expenses from wages and benefits.

Now I'll turn the call over to Matt, who will cover the balance sheet and cash flows and provide an update on emerging markets.

Matthew Schlarb - RPM International Inc. - Senior Director of IR

Thank you, Mike. Moving to Slide 11. The positive momentum in working capital improvements continued in the third quarter as inventories declined by $261 million compared to the prior year. Year-over-year in the third quarter, we reduced working capital as a percentage of sales by 580 basis points to 21.4%. This contributed to a record $173 million in cash flow from operating activities during the quarter.

Over the trailing 12-month period, we have generated $1.26 billion in cash flow from operating activities, which is a record and represents an increase of $969 million from the same period in the prior year. We have used the strong cash flow to reduce debt by $629 million compared to the prior year and returned $210 million in cash to shareholders through dividends and share repurchases during the first 9 months of the fiscal year.

On Slide 12, I'd like to highlight investments we've been making in emerging markets. As we've previously discussed, businesses in Asia Pacific, Africa and the Middle East have recently aligned under a new management structure. This alignment has resulted in improved coordination and growth has accelerated as we are better positioned to capture increasing demand for our engineered solutions serving infrastructure projects. We've seen this growth continuing, and we are making investments in new plants in Malaysia and India to add capacity, reduce shipping costs and improve our ability to serve our customers.

In line with our Building a Better World initiative, the construction of these plants incorporate several sustainability features, including solar panels, rain water harvesting and a solvent recovery system. These plants are also incorporating MAP manufacturing improvement initiatives and will produce from multiple brands across RPM segments, demonstrating the increased collaboration between RPM businesses that has been enabled by MAP. The Malaysian facility is scheduled to open in the first half of fiscal 2025, and the Indian plant is expected to come online in the second half of fiscal year 2025.

Now I'd like to turn the call over to Rusty to cover the outlook.

Russell L. Gordon - RPM International Inc. - VP & CFO

Thanks, Matt. Our fourth quarter and full year outlooks are on Slide 13. On a consolidated level, fourth quarter sales are expected to be approximately flat compared to a record prior year period. CPG is expected to lead growth with sales up low to mid-single digits, driven by demand for solutions serving infrastructure and institutional projects and its focus on restoration and maintenance.

After multiple years of achieving record sales, PCG sales are expected to be approximately flat in the fourth quarter. This is primarily due to the timing of project completions, including some that were pulled forward into the third quarter. Additionally, PCG's results will be impacted by a previously announced business divestiture.

SPG sales are expected to decline in the mid-single-digit percentage range as the disaster restoration business remains challenged, while specialty OEM markets stabilize, albeit at low levels.

In Consumer, market share gains are expected to be more than offset by continued softness in DIY demand, resulting in sales declining in the mid-single-digit range. With these continued share gains, we believe we are poised to achieve accelerated growth when existing home sales and DIY markets ultimately recover.

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

Consolidated fourth quarter adjusted EBIT is expected to increase in the high single-digit percentage range compared to a record prior year period driven by MAP 2025 benefits, which are being partially offset by under-absorption from lower volumes.

Finally, our full year guidance is at the bottom of Slide 13. We anticipate that full fiscal year sales growth will be near the midpoint of our previous guidance of up low single digits and adjusted EBIT growth will be near the midpoint of our previous guidance of up low double digits to mid-teens.

This concludes our prepared comments. We will now be pleased to answer your questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) And our first question today comes from Joshua Spector from UBS.

Lucas Charles Beaumont - UBS Investment Bank, Research Division - Associate Analyst

It's Lucas Beaumont on for Josh today. Just wanted to start with Consumer, if we could. So I just wanted to get your view, current view on sort of whether you think now the sort of sell-in was reconnected with the takeaway at the retail stores, something you called out that the takeaway there was weak. And assuming things have sort of got more in sync now, how do you kind of see the outlook there at the retail level over the next couple of quarters? And when should we expect to return to volume growth?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

Sure. So we expect a continuation in Q4 of what you have seen in Q3 and for most of fiscal '24, with continuing relative strength in Construction Products and Performance Coatings and some challenges in the Consumer segment and Specialty Products Group particularly in relationship in the Consumer segment to a very strong fourth quarter last year. I would expect we're going to start to see an improvement and Consumer takeaway and a return of volume as we get into fiscal '25.

Lucas Charles Beaumont - UBS Investment Bank, Research Division - Associate Analyst

Great. And then just on the continued strength on the CPG side. So I mean you guys basically beat your volume expectations for about 4 quarters in a row, despite the kind of broader macro indicators pointing to slowing. 3Q was kind of more in line. Could you maybe just kind of give us your thoughts there and sort of split out the benefits that you're seeing between the infrastructure reassuring versus the base growth? And I mean, should we see a reconnection with those macro indicators at some point? Or how do you see that kind of playing out?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

Sure. So we see momentum continuing for both our Performance Coatings Group and our Construction Products Group into Q4 as well as into fiscal '25. It's worth noting that the Construction Products Group performance has been despite a lot of weakness in the core noncommercial, core commercial construction products market, certainly been relatively weak. We picked that up in infrastructure as well as a lot of the projects that we referenced.

And then look going forward, we're well positioned. Our backlogs are in good shape and quite candidly globally, and this is broadly speaking. We're not through a fraction of the trillions of dollars of government stimulus, mostly in the United States, but in other parts of the world, they're helping to drive this. And so whether it's the onshoring and/or friendshoring in Europe and in North America. We're pretty well-positioned to continue to win more than our fair share of those projects, and we see that continuing for the coming quarters.

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

Operator

Our next question comes from Frank Mitsch from Fermium Research.

Frank Joseph Mitsch - Fermium Research, LLC - President

Frank, hopefully, you're someplace nice today. Let me follow up on that last comment. You said that the backlogs are looking pretty good. Was that a construction products specific comment? And is there any way that you can kind of size order of magnitude relative to where you are historically on the 4th of April?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

Sure. I wouldn't comment on that any particular specificity. But our backlogs are good in Construction Products. Our Performance Coatings Group continues to see good momentum. We will have a little bit of a weaker fourth quarter as we projected, partly because of project completions. I think it's worth looking at the second half. If you include the guidance that we provided here, for all of RPM, second half of '24, the third quarter we just reported and the guidance that we reaffirmed relative to our full year would suggest sales growth on a consolidated basis at flat or plus 1% and adjusted EBIT growth in the 13% to 14% range.

And I mentioned that because we had some acceleration or completion of projects at the end of Q3 that otherwise would have fallen into Q4 in Construction Products and Performance Coatings. But the backlog in both is really strong. It's an odd start for us and everybody in Q4 because of the way holidays fell, there were 3 less shipping days in March, and there are 3 more shipping days in April. So we're also having some odd comparisons to prior years on a monthly basis. But in general, both of those segments are in really good shape and the dynamics that have led to record sales growth, positive unit volume growth and margin expansion feel like they're continuing.

Frank Joseph Mitsch - Fermium Research, LLC - President

That's very helpful. And then if I could follow up on the Consumer side. I believe the last time we spoke, the interplay between price and raws was looking to turn positive in Consumer. If you could just offer some comments as to how that stands and maybe a comment in general on raws. I know that the expectation was that we would see peak raw material deflation in the second half of '24. Is that still your assumptions?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

It is still our assumption, and that's what we're experiencing. In fact, in particular, with our Consumer Group, we're starting to see some raw material upticks in a few select areas, acetone is up significantly. That is kind of an outlier. Propellants up a little bit. Plastic cartridges are up. And so we're seeing some return of inflation or pricing in a few categories that particularly impact our Consumer Group. But overall, we are at the point at which I think the commodity cycle recovery is what we're experiencing. We'll see a little bit of that in Q4. And then I think time will tell as we look out into our new fiscal year.

Operator

Our next question comes from Mike Harrison from Seaport Research Partners.

Michael Joseph Harrison - Seaport Research Partners - MD & Senior Chemicals Analyst

Congrats on the strong cash flow in particular. I was wondering if you could give a little more detail on what's going on with the margin performance in the Specialty segment. The revenue there was pretty similar to last quarter, but the adjusted EBITDA looks like it was close to $5 million that is

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

lower compared to last quarter on a sequential basis there. What's driving that? And if you can provide any help on how we should think about specialty margins going forward?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

I will let Rusty Gordon handle that question about both the Specialty Products Group performance in the quarter and year-to-date and kind of where we see it going.

Russell L. Gordon - RPM International Inc. - VP & CFO

Yes. In terms of Specialty performance in the quarter, we really did not have any disaster restoration business to speak of, Mike, during the quarter. No weather events really drove sales. So as a result, we really suffered from under-absorption. We continue year-over-year to have an unfavorable comparison like we did in the second quarter and that we divested our furniture warranty business. And then in general, OEM volumes looks soft, not as bad as it's been. It's getting a little bit better. So we do have some reason to hope that, that will improve.

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

And then I would add to that, Mike, that the impact of weather-related events last year was very significant in Q3. We don't have exactly that same challenge comparatively in Q4. And the Guardian warranty business, which was really not core to us, it was an insurance business and had nothing to do with products was a very high-margin business, and that was sold last year in the third quarter. And so again, we will not be seeing the negative comparison of that when we get into the fourth quarter as well.

So as Mike Laroche commented, we're starting to see in the core OEM coatings categories, things flattening out. And we won't have the same big challenging comparisons of the Guardian divestiture or the significant weather-related events at Legend Brands that have impacted Q3.

Michael Joseph Harrison - Seaport Research Partners - MD & Senior Chemicals Analyst

All right. And then I was hoping that maybe you could provide some initial comments as we're starting to turn our attention to fiscal '25 think about earnings growth. Consensus is looking for EBITDA to be up by kind of a high single-digit number compared to fiscal '24. Is that a reasonable starting point for now? And maybe talk a little bit about some of the puts and takes as we're thinking about earnings growth next year.

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

Sure. Other than reemphasizing some comments that we've already made, which I'll do in a minute, we're not really prepared to provide guidance for fiscal '25 with any detail. We will do that when we report fourth quarter results in July and then we'll provide some more detail for how we see fiscal '25 shaking out. The comments that we have made are, we're going to be rounding easier comparisons as we just talked about in our Specialty Products Group. I think at some point, as we get into fiscal '25, we're going to see both easier comparisons and some market share-related wins, some positive unit volume growth coming back to our Consumer segment. And we see continued good momentum in the economic and market and infrastructure dynamics that we've been talking about for Construction Products and Performance Coatings.

So we are planning on our tenth consecutive quarter of record sales and earnings in Q4. And I think we've gotten some good dynamics as we go into fiscal '25, but we'll provide more details on a consolidated basis and broadly by segment when we report Q4 in July.

Operator

Our next question comes from John Roberts from Mizuho.

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

John Ezekiel E. Roberts - Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst

Frank, can you tell us if RPM would be interested in PPG's North American architectural paint business? Or any thoughts around that?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

We generally don't comment about our acquisition activity until things are done. Certainly, M&A is picking up, and it was publicly announced that the -- I believe it's about $1.8 billion in revenue, PPG architectural -- North American Architectural Coatings business is going to be sold, divested or realigned. And so I think like anybody in the paint and coatings interest industry, we have some interest in pieces and parts, and we certainly intend to be part of any process and take a look at that. And that's more of the specifics that we generally would provide, but it's relatively unique that a divestiture process like this would be announced publicly and has been. And so we'll take a look at it.

John Ezekiel E. Roberts - Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst

The final year of MAP 2025 begins in a few weeks. Do you think there'll be a MAP 2028 program? Is that the right cadence to think about? Or do you think RPM will pivot to a different approach to strategy beyond MAP 2025?

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

That's a great question. And I think we're highly focused on achieving our MAP 2025 targets. And if you look at our performance through 9 months, I'm really proud of the incredible work of the RPM associates around the globe. You can see our MAP '25 initiatives having tremendous impact. We are improving working capital. We are improving margins. We are focused on driving a more favorable mix and whether it's operating improvement initiatives in our plants, whether it's taking some of the MS-168 disciplines into the commercial area. We're having a lot of success. You can see it clearly in our cash flow, which is at meaningfully higher record levels.

And so the things that we can control are working really well. One thing that we've talked about and makes sense when you look at the areas that we're focused on in MAP '25, when we have a return to unit volume growth in Specialty Products and Consumer, you'll see even better results out of those businesses, much like the real strong leverage we generated in Q3 with Performance Coatings and Construction Products, both of whom had positive unit volume growth in the quarter and we've had it throughout the year. So we're pretty excited about that.

There will be a new program, and it will be something that we will be talking about publicly either next spring or next summer, exactly what we call it. I couldn't tell you yet. But the MAP initiatives have a lot of legs, particularly on the commercial side and the data side. And there will be a new program, and we will provide details, I would say, roughly a year from now. But in the interim, we're going to be focused on hitting the 42% gross margin goal and the 16% EBIT margin goal that we set out a few years ago.

Operator

Our next question comes from Dave Huang from Deutsche Bank.

Yifei Huang - Deutsche Bank AG, Research Division - Research Associate

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?

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APRIL 04, 2024 / 2:00PM, RPM.N - Q3 2024 RPM International Inc Earnings Call

Frank C. Sullivan - RPM International Inc. - Chairman, President & CEO

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.

Yifei Huang - Deutsche Bank AG, Research Division - Research Associate

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 C. Sullivan - RPM International Inc. - Chairman, President & CEO

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 L. Gordon - RPM International Inc. - VP & CFO

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 Patrick McNulty - BMO Capital Markets Equity Research - MD & Senior United States Chemicals Analyst

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?

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